Legal and tax framework for digital property in the Republic of Serbia
Author: Attorney-at-Law Todorović A. Aleksandra, the Law Firm “VUK Tax Attorneys”
Date: 19th January 2021
In an effort to define the concept and significance of digital assets, and primarily to legally regulate area of trading of so-called cryptocurrencies, the National Assembly of the Republic of Serbia passed the Law on Digital Property on 17th December 2020 (hereinafter: the “Law”), with proclaimed goal to enable commercial entities to trade freely on online platforms and thus make a profit.
Digital property is defined by Law as a digital record of value that can be digitally acquired, sold, exchanged or transferred, and which can be used as means of exchange or for investment purposes, whereby digital property do not include digital currency records that are legal tender and other financial property regulated by other laws. Such a broad definition encompasses all digital assets regardless of the technology on which a particular digital asset is based.
Further, the Law defines two types of digital assets, i.e. virtual currencies and digital tokens. Virtual currency (cryptocurrency) is a type of digital property that is not issued and whose value is not guaranteed by the central bank or other public authority, which is not necessarily tied to legal tender and has no legal status of money or currency, but which is accepted by individuals or legal entities as means of exchange that can be bought, sold, exchanged, transmitted and stored electronically. A digital token is a type of digital property that relates to any intangible property right that in digital form represents one or more other property rights, which may include the right of digital token’s user to be provided with certain services.
The process of issuing digital property is based on the concept of initial offer. As important part of the procedure, an institute of "white paper" is introduced, which is published when issuing digital property, and contains information about the issuer of digital property, digital property itself, and risks associated with it, all with the aim of enabling investors to make informed investment decision. After the approval of the white paper by the competent authority, the initial offer is deployed, i.e. announced. Although approval of the white paper is primarily set as condition for deployment of initial offer, it is possible to announce initial offer without approved white paper, by fulfilling certain conditions prescribed by Law. Next step is payment of digital property in monetary funds, in digital property, and/or in services of the acquirer of that property (e.g. transfer of issued digital property to persons who “mine” that digital property).
The Law does not apply to transactions with digital property if those transactions are performed exclusively within a limited network of persons who accept that digital property, and given as an example for this exception is the use of digital property for certain products or services, as a form of loyalty or reward, without possibilities of its transfer or sale. Also, digital property mining is excluded from the scope of the Law. Mining is defined as acquisition of digital property by providing services of computer verification for transactions in information systems relating to specific digital property, and persons engaged in mining are not specifically regulated by this Law, nor required to obtain any license. However, when they decide to sell acquired digital property, the Law applies to them as well.
The general rule is that the Law on Capital Markets applies to the issuance of digital property that has all characteristics of a financial instrument, as well as to secondary trading and the provision of services related to such digital assets. In this regard, the Law prescribes significant exception, which allows most financial instruments to be issued in the form of digital property, while completely bypassing the regulations governing capital markets. The conditions for such emission to be allowed are that:
- digital property does not have the characteristics of shares;
- digital property is not exchangeable for shares;
- the total value of digital property issued by one issuer during a period of 12 months does not exceed the amount of 3,000,000 EUR in RSD equivalent.
The Law entered into force on 29th December 2020, and it starts to apply after expiration of six (6) months’ period from the day of entry into force, i.e. from 30th June 2021. Within the said period, i.e. until 29th June 2021, entities providing services related to digital assets are obliged to harmonize their business operations and general acts with provisions of the Law and accompanying bylaws adopted, and to submit an appropriate request for issuance of permit to the supervisory authority, i.e. to the Serbian National Bank for services related to cryptocurrencies, or to the Securities Exchange Commission for services related to digital tokens, or to both bodies if digital property has hybrid characteristics, from which it follows that engaging in these activities is allowed even before the Law will start to apply.
The legislator also included digital property into taxation system by amending certain tax laws. Namely, on 26th November 2020, the Law on Amendments to the Law on Property Taxes was adopted, which, amongst other, stipulates that acquisition of digital property through inheritance or gift is subject to inheritance tax and gift tax. These changes came into force on 1st January 2021.
Also, the amendments to the Law on Personal Income Tax and the Law on Corporate Income Tax of 17th December 2020, which apply from the date of entry into force of the Law (i.e. as of 29th December 2020), the tax liability on capital gains may also arise from the transfer of digital property, both for individuals and legal entities.
For the purpose of determining the capital gains of individuals according to the Law on Personal Income Tax, the purchase value of digital property is considered to be the price that the taxpayer can document as actually paid. Exceptions to this general rule are provided for cases of transfer of digital property acquired by the taxpayer:
- By participating in the provision of mining services of digital property, which was subject to taxation as other income – when the purchase price is considered to be the amount that served as basis for payment of tax on other income;
- From his employer or its related party free of charge, or at preferential price, when income of natural person was subject to salary tax – purchase price is considered as sum of documented price at which the taxpayer acquired the property and the amount that served as basis for payment of salary tax.
Said amendments to the Law on Personal Income Tax also provide for tax exemptions for taxpayers who invest proceeds obtained from sale of digital property within 90 days from the date of sale, into share capital of Serbian resident company, i.e. into the capital of an investment fund, and whose centre of business and investment activities is located at the territory of Serbia, in which case tax exemption of 50% of capital gains tax is applied. Also, a taxpayer who, within 12 months from the date of the sale of digital property, invests the funds obtained from sale of digital property for aforementioned purposes, will be refunded in the amount of 50% of paid capital gains tax.
Tax rate that applies on capital gains of individuals in accordance with Personal Income Tax Law is 15%. On the other hand, income from capital gains, including capital gains generated from sale of digital property, are not included in the basis for the calculation of annual income tax.
Regarding amendments to the Law on Corporate Income Tax, for determining capital gains of legal entities, purchase price of digital property is defined as price that the taxpayer can document as actually paid, and if digital property was acquired through so-called mining, the purchase price is the value of digital property stated in taxpayer’s business books, in accordance with IAS, i.e. IFRS, i.e. IFRS for SMEs and adopted accounting policies. However, said accounting regulations do not contain clear rules for recording digital assets in business books. Capital gains realized from sale of digital assets are not included in the taxable base for corporate income tax, if proceeds from sale are invested in same tax period into the share capital of Serbian resident company, or an investment fund whose centre of business and investment activities is located at the territory of Serbia. Corporate income tax rate is 15%.
Instead of a conclusion, we can point-out two aspects from which the uncertainty in the application of the Law arises:
- The Law on F/X Transactions with accompanying regulations does not recognize foreign exchange transactions related to digital property (type of transaction, basis for payment/collection, inflow/outflow code, etc.), which can create an obstacle to monetary transfers to/from abroad for the purpose of acquisition of/disposal with digital assets, primarily cryptocurrency;
- Personnel and technical capacity of the Serbian Tax Administration is questionable, in regard to full and proper determination of all facts concerning digital property, which is necessary for making lawful decisions in proceedings for respective tax assessment.