New rules on taxation of non-resident legal entities
Authors: Attorneys-at-law, Vojinović B. Milan and Rilaković G. Ilija, the Law Firm “VUK Tax Attorneys”
Date: 17th April 2018
In accordance with rules that were applicable until 31st March 2018, income obtained by non-resident legal entities from services performed or used at the territory of the Republic of Serbia, was taxable with withholding corporate income tax. This rule caused a lot of doubts in practice, since it was often impossible to determine with certainty whether some service will be supplied or used in the Republic of Serbia.
Most recent amendments of the Corporate Income Tax Law, that are applicable as of 1st April 2018, define that withholding corporate income tax at the 20% rate, is chargeable and paid on income obtained by non-resident legal entities from resident legal entities, only for following services: market research, accounting and auditing, other legal and business consulting services, regardless of the place of their supply or use, unless international Treaties on Avoidance of Double Taxation provide for different regime, i.e. for non-taxation in the Republic of Serbia of said services.
Additionally, the Finance Minister enacted the “Rulebook on Types of Services from which Non-resident Legal Entities Generate Income Subject to Withholding Tax” (the “Rulebook on Types of Services”), as well as the “Rulebook on the Content of Tax Declaration for Calculating Withholding Tax on Income Generated by Non-resident and Resident Legal Entities” (the “Rulebook on Withholding Tax Declaration”).
The Rulebook on Types of Services defines services that are considered as market research, and it also specifies that market research does not include advertising and marketing services, meaning that payment of remuneration for latter services is not subject to withholding corporate income tax. On the other hand, scope of application of new rules is rather moderate, because only few business entities from Serbia have need to use services of foreign auditors, accountants or law firms. On the other side, domestic lawmakers did not omit this opportunity to leave room for legal uncertainty, so they defined legal and business consulting services as “services related to every form of legal and business consulting, and in particular tax consulting services, attorneys’ services, management services, as well as any kind of providing advices and consultancy in regard to business operations of resident legal entity” (!), which obviously creates possibility for various interpretations by competent state authorities, primarily with regard to last group of services (any kind of providing advices and consultancy…), and leaves taxpayers in doubt as to how to treat certain types of services. Regarding the Rulebook on Withholding Tax Declaration, deadline for filing PDPO/S tax declaration is now extended. Namely, in accordance with rules that were applicable until 31st March 2018, resident legal entity was obliged to file tax declaration PDPO/S on the same day when income, taxable by withholding corporate income tax, is paid to non-resident legal entity, as well as to pay calculated tax on the same day. Such obligation often caused practical problems for income payers. Therefore, amendments of said provisions were made, so in accordance with new Rulebook on Withholding Tax Declaration, income payer – resident legal entity files tax declaration PDPO/S, calculates, withholds and pays corporate income tax, within three (3) days from the day when income is paid to non-resident legal entity. Also, income payer does not file tax declaration PDPO/S when Treaties on Avoidance of Double Taxation provides that tax is to be paid in another country, under condition that income payer possesses evidences, at the moment of paying income, that non-resident legal entity is tax resident of the country with which Serbia concluded Treaty on Avoidance of Double Taxation, and that this non-resident legal entity is beneficial owner of income. This eliminates unnecessary obligation to file tax declaration in cases when withholding tax is not payable, which is in line with the fact that corporate income tax is self-assessed by taxpayers. Withholding tax is calculated and paid in accordance with rules applicable on the day of paying income. Therefore, new rules relating to withholding corporate income tax are applicable to all payments performed as of 1st April 2018, regardless if services are supplied and/or invoiced before that date, i.e. regardless when the basis for paying income to non-resident legal entity was established. Rules concerning income payments for services to non-resident legal entities from jurisdictions with preferential tax system, remain unchanged. Namely, this means that payments of income to non-resident legal entities from “tax havens”, against any kind of services, regardless of the place of their supply or use, are taxable by withholding corporate income tax at the 25% rate.
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