Implementation of the Law on Origin of Property and Special Taxation
Author: Law Firm “VUK Tax Attorneys”
Date: 3th August 2020
On 29th February 2020, Serbian National Assembly enacted the Law on Origin of Property and Special Taxation (the “Law”), that entered into force on 11th March 2020, and will be applied after one year, i.e. as of 12th March 2021. Subject matter of the Law is to regulate conditions, manner and procedure for determination of natural person’s property and increase thereof, his declared income and to impose special tax on increase of property, for which an individual cannot demonstrate that he acquired it legally..
It is unclear whether the Law can be considered to be exclusively a tax regulation, given the content of the provision of the Article 11, Paragraph 2 of the Law, according to which the Government of the Republic of Serbia (the "Government"), and not the Ministry of Finance (which would be expected), defines the manner and procedure for determining the value of assets and income for the purpose of applying the Law. In addition, the Law also affects the organization of the Tax Administration (the “TA”), by introducing a special organizational unit – the Tax Administration Unit (“TAU”), whose head is appointed by the Government on the proposal of the Minister of Finance, which is rare occurrence within the TA, bearing in mind that the Government, on the proposal of the Minister of Finance, appoints only the Director of the TA, the Deputy Director of the TA and the Chief Inspector of the Tax Police.
The essential question that arises in connection with the application of the Law is whether the confiscatory tax rate of 75% imposed by this Law can be legitimately applied in the case when it is not proven, nor there is reasonable suspicion that the property was acquired by committing criminal acts. An extremely high rate of special tax could make sense in case of reasonable suspicion that the property was acquired by committing criminal acts, because in that way the defendant would be deprived of three quarters of what he saved if he is charged with committing a criminal act. In that case, the defendant will certainly not explain the manner of acquiring discussed property, because that could practically lead to confession of committing a criminal act.
The property that is potentially subject to inspection in accordance with the Law is the entire property of a natural person, both in the Republic of Serbia and abroad, whether registered or not. However, it is unclear how taxpayer’s assets abroad would be inspected. Also, the Law does not regulate the status of property acquired and/or alienated free-of-charge (inheritance and gift), and thus taxpayers, whose intention is to remain outside the domain of potential inspection by TAU, are potentially left with the option to distribute their assets within immediate or wider family, through available legal transactions.
Illegally acquired property is considered to be the property that represents a difference, with higher value than 150,000 EUR, between the increase of property and reported income in a period of maximum three (3) consecutive calendar years in which there was an increase in property of an individual, for which he cannot prove origin, i.e. he cannot demonstrate that it was acquired in lawful manner. In the particular case, the presumption of illegality introduced by the Law is very dubious, because the Law defines that it is sufficient for the TAU to make it probable in the initial procedure that there is a difference between the increase of property and reported income in the amount of more than 150,000 EUR, without enacting any respective resolution, that could be subject to appeal, but the TAU immediately initiates audit procedure in which illegally acquired property and its value are determined for tax assessment. Furthermore, there is a deviation from the provisions of the Law on Tax Procedure and Tax Administration (the “TPTA Law”), regarding the burden of proof which is imposed to the taxpayers by the Law, while the TPTA Law explicitly defines that in the tax proceedings the burden of proof is on the TA for facts that serve as a basis for tax assessment. Also, the Law does not specify the procedure for submitting evidence proving the legality of acquiring the taxpayer's property. If we take into account that in criminal proceedings there is a series of established rules in favour of the defendant, such as presumption of innocence, the principle in dubio pro reo(in doubt, the facts are interpreted in a way more favourable for the defendant), the principle ne bis in idem (the defendant may not be subjected to trial twice for the same act), it seems illogical for the Law to introduce a rule, at the detriment of the taxpayer, by which the burden of proof imposes obligation to taxpayer to demonstrate that he acquired property in lawful manner.
The Law defines that special tax which is paid, is included for the purpose of calculating value of the gain obtained by criminal act, in the event that existence of this gain is determined by verdict in criminal proceedings, as well as in the procedure of confiscating property acquired by crime. The question is why to impose tax on property that would anyhow be confiscated in criminal proceedings? Property that is illegally acquired, is not taxed but confiscated, after proving illegality thereof in the appropriate court proceedings in accordance with the Articles 538 and 539 of the Criminal Proceedings’ Code.
Illegally acquired property is a category for which a simple presumption cannot be introduced, i.e. the question arises: which fact or circumstance constitutes illegality of such property, especially if we consider that the Law on Confiscation of Property Acquired by Crime regulates the status of property acquired in a manner that is contrary to law, i.e. by committing crime. Thus, the Law on Confiscation of Property Acquired by Crime defines that in case there are grounds for suspicion that a certain person possesses significant assets acquired by committing crime, the Public Prosecutor will order financial investigation of the owner of property. In the event it is probable that subsequent confiscation of property resulting from the criminal act, would be difficult or impossible, the Public Prosecutor submits a request for temporary confiscation of property, and only after the verdict establishing that the crime was committed becomes final, the Public Prosecutor submits a request for permanent confiscation of such property. Therefore, the sanction for possession of property that was acquired contrary to the law is its confiscation, but only when it is proven beyond any doubt, within legally completed procedure, that this property was acquired by committing a crime.
Finally, we remind that the Article 59 of the TPTA Law has been in force since 2002, which defines the method of cross-assessment of tax basis, by which the value of the increase of taxpayer's (natural person's) property is compared in the observed period with reported sources of income from which his property could arise. In this regard, if taxpayer did not acquire certain property (e.g. real estate) on the basis of inheritance or gift in the controlled period, and the TA determines that his declared income in the same period is lesser than the value of that property, the difference is taxed as undeclared income. An important difference in comparison to the Law, is that in accordance with quoted provision of the TPTA Law, the value of taxpayer's property includes assets that were disposed against compensation or free-of-charge, as well as funds used by the taxpayer to purchase property in the name of third parties in a calendar year, which is not the case with the Law. The TA have very rarely applied in practice quoted Article 59 of the TPTA Law.