Tax Credit Based on Investments in Alternative Investment Fund (AIF)

Author: Attorney-at-Law Milačić Z. Vladimir, Law Firm “VUK Tax Attorneys”

Date: 7th December 2024

Latest Amendments to the Serbian Law on Personal Income Tax (“Official Gazette of the RS”, no. 24/2001…94/2024; hereinafter: the “Personal Income Tax Law”), which entered into force on 6th December 2024 and will apply for determining annual personal income tax for 2024, introduced legal grounds for forfeiture of previously acquired tax credit based on investment in an Alternative Investment Fund (AIF).

We remind that amendments to the Personal Income Tax Law from 2020 introduced tax benefit for individuals, that are subject to annual personal income tax, who make investments in an AIF, i.e. who purchase stock, shares or investment units of AIF. Under this incentive, taxpayers are entitled to tax credit in the amount of up to 50% of the investment made in the calendar year for which the annual tax is determined, and up to 50% of the assessed annual personal income tax. This effectively reduces the amount of annual personal income tax for the amount of investment (not the tax base), making it most favorable form of tax benefit.

Primary objective of this tax incentive is to support development of domestic alternative investment funds and to encourage citizens to participate and invest more actively in capital markets of the Republic of Serbia. By investing monetary funds into an AIF, taxpayers acquire the right to tax credit which directly reduces their tax liability, and may also generate passive income based on the invested capital.

However, pattern of misuse was identified in practice, where taxpayers were purchasing stocks, shares and investment units in AIF at the end of the calendar year, solely to qualify for tax credit and reduce their tax liability for annual personal income tax, only to dispose those same assets at the beginning of the following year. In such cases, the tax incentive was misused for short-term investments aimed exclusively at reducing tax liability, without genuine intent for long-term investments, thereby turning this tax incentive into blatant instrument for tax optimization, which stands in opposition to the purpose of the tax incentive and the legislator’s intention.

According to the latest amendments to the Personal Income Tax Law, taxpayer will forfeit previously acquired tax credit if he disposes of the stocks, shares, or investment units of the AIF in the same calendar year in which the investment was made, or within the following three (3) calendar years. These amendments prevent misuse of the tax incentive through short-term investments aimed to acquiring tax credit, and impose legal obligation on taxpayers to retain their investment in the AIF for at least three (3) calendar years following the year of investment, if they wish to keep the right to acquired tax credit.

The taxpayer is obliged to notify the Tax Administration of the forfeiture of the tax credit no later than 30 days from the date of disposal of AIF’s stocks, shares or investments units, and to return the amount of previously acquired tax credit, increased for statutory default interest calculated from tax due date until the date of repayment. The obligation to repay the tax credit with statutory defaults interest serves not only to neutralize economic benefit obtained through abuse of the tax incentive, but also to deter any future misuse by imposing additional financial burden in the form of interest.

In this manner, taxpayers are prevented from obtaining tax relief through short-term capital market investments, whereby the legislator sends clear message that the purpose of this tax incentive is not to support short-term investment strategies, but rather to promote genuine and long-term investments in an AIF and in the capital markets.

Our Law Firm will continue to closely monitor all future changes of the tax treatment of investments in an AIF in order to effectively assist clients, drawing upon our substantial expertise and legal insight, in resolving any uncertainties and successfully participating in the capital markets.