After you have chosen the appropriate form of registering your business, whether it is in the form of an entrepreneur or, for example, a limited liability company, it is important that you become familiar with tax obligations in Serbia in a timely manner. In addition to the obligation to be familiar with the process of registering the appropriate business form, it is important to optimize your business and tax obligations as much as possible. The goal of every company is to achieve the highest possible profit, and one of the ways to achieve this is to optimize your tax obligations, that is, to use all the benefits prescribed by law in order to reduce your tax liability.
In the following, we will show and present the most important models of taxation as well as tax incentives that you can use in your business. In addition to the above, we will introduce you to the legal deadlines for fulfilling tax obligations as well as your rights and obligations in that case.
Types of taxation
Depending on the registered form of your business, your company is a taxpayer of different types of taxes.
If you perform your activity as an entrepreneur, in accordance with the current regulations, you are liable for personal income tax, that is, you pay tax on income from independent activity. In this case, there are three types of taxation that may apply:
– flat rate taxation,
– obligation to keep business books,
– value added tax (VAT) payment system.
Flat rate taxation
In case you have opted for flat-rate taxation, the taxable revenue shall be income determined on a lump sum basis. The above means that at the beginning of each calendar year, based on the decision of the competent branch of the Tax Administration, you will be able to determine the amount of the tax base, and therefore the amount of tax that you will be obliged to pay. The advantage of this type of taxation is that during one calendar year, the amount of tax you will be obliged to pay will be the same. You can submit a request for flat-rate taxation immediately at the time of registration with the Serbian Business Registers Agency. However, if you have not done so, you can submit a request for flat-rate taxation by October 31 of the current year for the following year, that is, within 15 days from the date of receipt of the act of the competent tax authority confirming the deletion from the records for value added tax, and no later than December 31 of the current year.
When you registered as a lump sum entrepreneur, you are obliged to keep only a business book on the realized turnover.
Finally, keep in mind that you will not be entitled to flat-rate taxation, in case you are engaged in certain business activities, as well as if your total turnover in the year preceding the year for which the tax is determined is greater than 6,000,000dinars, in which case you are obliged to keep business books. You will not be entitled to flat-rate taxation if:
1) you perform activities in the field of advertising and market research;
2) you perform activities in the fields of: wholesale and retail trade, hotels and restaurants, financial mediation and activities related to real estate;
3) other persons also invest in your activity;
4) is your total turnover in the year preceding the year for which the tax is determined, i.e. whose planned turnover when the activity begins – is greater than 6,000,000 dinars;
5) you are registered as a VAT payer.
A taxpayer who keeps business books
The payer of tax on the revenues stemming from self-employment shall be any natural person who earns income by performing economic activities, including agricultural and forestry activities, by providing professional and other intellectual services, as well as income from other activities, if tax is not paid on that income on another basis. Income from independent activity is also considered to be income generated by permanent or seasonal use of land for non-agricultural purposes (extraction of sand, gravel and stones, production of lime, bricks, tiles, charcoal, etc.), incubator-based production of poultry, as well as other similar activities, regardless of whether they are registered as independent activities with the competent authority.
A taxpayer can pay tax on income from self-employment on taxable profit or on flat-rate income (flat-rate entrepreneur, as stated above). A tax payer is also considered a tax payer based on income from agriculture and forestry – a natural person who is the holder of a family agricultural farm registered in the register of agricultural farms, who keeps business books and pays tax on income from self-employment on taxable profit.
Therefore, if you have not opted for flat-rate taxation, or if you do not have that option by law, the taxable revenue stemming from self-employment shall be the taxable profit. Taxable profit is determined in the tax balance by adjusting the profit shown in the income statement. In that case, you are obliged to keep business books and report business changes in them. In addition, you are obliged to keep business books and accounting documents for at least 5 years from the last day of the business year to which they refer.
As this method of taxation differs from the flat-rate taxation that we explained above, it is important that you know that this method of taxation (so-called self-taxation) can be realized in two ways
1) in the case of simple self-taxation, tax and contributions are calculated and paid on the difference between income and expenditure;
2) in case you pay yourself personal salary, tax and contributions are calculated and paid on the amount of personal salary.
In the event that, as a resident of the Republic of Serbia, you have earned income in another country, on which tax has been paid in that other country, you are entitled to a tax credit in the amount of tax paid in the other country. The above applies if an agreement on the avoidance of double taxation has been signed between the Republic of Serbia and the country in question in which the tax was paid.
Keep in mind that you can keep business books and apply this type of taxation only if your total turnover is not greater than 8,000,000 dinars. If your total turnover exceeds the specified amount, you are considered liable for value added tax.
VAT system
As stated, you become liable for VAT if your total turnover exceeds 8,000,000 dinars. However, keep in mind that even after registering your company in the Serbian Business Register Agency, you can submit a request for registration in the VAT system.
The tax base for the turnover of goods and services is the amount of compensation that the taxpayer receives or should receive for delivered goods or services from the recipient of the goods or services or a third party, including subsidies and other receipts that do not include VAT. The general VAT rate for the taxable turnover of goods and services or the importation of goods is 20%, while the turnover of certain, tax-specified goods and services is taxed at a special rate of 10%.
Independence test
However, the Law on Personal Income Tax prescribes certain exceptions, i.e. the situation when the income you earn will be taxed as other income and not as income from independent activity. Namely, if it is determined that you are not independent, that is, if you do not pass the so-called “independence test”, the income you generate will be considered as other income. In this sense, the law prescribes certain criteria, and if you fulfill five out of nine criteria, it is considered that you are not independent in your work. This is particularly important for the IT sector, because the intention of the legislator was to reduce the number of situations in which, due to tax optimization, a business cooperation contract is concluded instead of an employment contract. It is important to keep in mind that, if it is determined that you are not independent in relation to the principal, the principal is the one who is responsible for paying taxes and contributions. If the client is a foreign legal entity, this responsibility is on you as an entrepreneur. In the aforementioned case, this income is taxed at a rate of 20%, and below are the criteria that make up the “independence test”:
(1) the principal or a person related to the principal determines the working hours of the entrepreneur or the flat-rate entrepreneur or the vacation and absences of the entrepreneur or the flat-rate entrepreneur depend on the decision of the principal or a person related to the principal and the remuneration of the entrepreneur or the flat-rate entrepreneur is not reduced in proportion to the time spent on vacation;
(2) an entrepreneur or a lump-sum entrepreneur normally uses the premises provided by him or performs work in a place designated by the principal or a person related to the principal for the purposes of performing the tasks entrusted to him;
(3) the principal or a person related to the principal carries out or organizes professional training or improvement of entrepreneurs or lump-sum entrepreneurs;
(4) the principal hired an entrepreneur or a flat-rate entrepreneur after advertising in the media the need to hire natural persons or by hiring a third party who usually deals with finding persons suitable for employment, and whose service resulted in the hiring of that entrepreneur or flat-rate entrepreneur;
(5) the principal or a person related to the principal provides its own basic tools, equipment or other basic tangible or intangible assets needed for the regular work of the entrepreneur or lump-sum entrepreneur or finances their procurement, except for specialized tools, equipment or other specialized tangible or intangible assets that may be necessary for the purpose of carrying out a specific job or order, or the principal or a person related to the principal usually manages the work process of the entrepreneur or the flat-rate entrepreneur, except for such management which entails giving a basic order in connection with the ordered work and reasonable control of the work results or supervision of the principal, as a good businessman , over the performance of the work he ordered;
(6) at least 70% of the total realized income of the entrepreneur or lump-sum entrepreneur in the period of 12 months starting or ending in the respective tax year was realized from one principal or from a person related to the principal;
(7) an entrepreneur or a lump-sum entrepreneur performs tasks from the activity of the principal or a person related to the principal, and for such performed tasks, his employment contract does not contain a clause according to which the entrepreneur or a lump-sum entrepreneur bears the usual business risk for the work delivered to the client of the principal or a person related to the principal , if such a client exists;
(8) the contract on the engagement of an entrepreneur or a flat-rate entrepreneur contains a partial or complete ban on the entrepreneur or a flat-rate entrepreneur to provide services based on contracts with other principals, with the exception of a partial prohibition that includes providing services to a limited number of direct competitors of the principal;
(9) an entrepreneur or a lump-sum entrepreneur performs activities for a fee for the same principal or for a person related to the principal, continuously or intermittently for 130 or more working days in a period of 12 months that begins or ends in the respective tax year, whereby the performance of the activity in one working day is considered the performance of activities in any period during that working day between 00:00 and 24:00
For the above reasons, it is very important to take care whether you meet the above criteria, and for the sake of proper regulation of tax obligations.
Corporate income tax
If you have registered your activity as a legal entity with the aim of making a profit, you are liable for corporate income tax. Even if your legal entity was not established with the aim of generating profit, it is also considered liable for corporate income tax. Accordingly, the tax base is taxable profit, while the tax rate is 15%. In addition, if your legal entity, as a resident taxpayer, makes a profit by doing business through a permanent business unit in another country on which tax is paid in that country, you are granted a tax credit in the amount of the profit tax paid in that other country, provided that it is between the Republic Serbia and those other countries concluded an agreement on avoiding double taxation. The list as well as the text of the double taxation avoidance agreement concluded by the Republic of Serbia can be found at the following link (https://www.mfin.gov.rs/propisi/ugovori-o-izbegavanju-dvostrukog-oporezvanja).
Tax exemptions and incentives
Although the legislator has foreseen many tax incentives and exemptions, in practice they are not used to their full capacity and to a large extent. The reason for this can also be insufficient information, that’s why below, you can familiarize yourself with the possibilities that you can use in your business and thus optimize your tax obligations.
Tax exemption for non-profit organization and incentive for investment in fixed assets
The law on corporate income tax prescribes a tax exemption for a non-profit organization for a tax period in which the realized surplus of income over expenses does not exceed 400,000 dinars. In addition to the stated main condition, additional conditions prescribed by law must be met.
The law also provides for tax incentives for taxpayers who invest in their fixed assets, that is, in whose fixed assets another person invests more than one billion dinars. In addition to the stated condition, in order to realize the right to a tax incentive, it is necessary for the said taxpayer to use the funds in question to carry out the main activity and activities listed in the founding act, and to additionally employ at least 100 people for an indefinite period of time during the investment period. The tax incentive is reflected in the exemption from paying corporate income tax for a period of ten years in proportion to the stated investment.
Tax incentive for the use of deposited author’s work and objects of related rights
If you are the holder of a copyright or related right, you have the possibility to exclude from the tax base the income generated on the basis of the fee for the use of the deposited copyright work or the subject of rights related to the copyright work, in the amount of 80% of the income thus generated. Namely, the legislator defines this kind of income as qualified income, and in order to realize the right to this incentive, the author’s work or objects of related rights must first of all be deposited. In this sense, you need to first go through the deposit procedure in accordance with the law, after which you can obtain the mentioned tax incentive.
What is important to point out is that the legislator gives the possibility to realize incentives only on the basis of the fee for exploitation, but not on the basis of the fee for the transfer of copyright or related rights as a whole.
Incentives related to research and development
If your company is engaged in research and development in the territory of Serbia, you have the possibility to have the costs directly related to research and development recognized in the tax balance in a double amount. It should also be taken into account what is considered under the research and development. Thus, the research undertaken by your company should be undertaken with the aim of acquiring new scientific or technical knowledge, while development is considered the application of the results of said research. However, the legislator does not condition the possibility of using the mentioned incentive by the fact that research and development must have certain results, but it is enough that they are undertaken with the described goal.
If your company is engaged in research and development, there is a possibility to get another incentive! Namely, as an employer, you are exempt from the obligation to pay 70% of the calculated and withheld tax from the wages of persons, i.e. your employees, who are directly engaged in research and development, in proportion to the time these employees spend on research and development in relation to full-time work.
Tax exemption for founder’s earnings
As an employer – a newly founded company, a newly founded entrepreneur and a newly founded farmer entrepreneur, you can exercise the right to exemption from paying taxes based on your own earnings (as a founder) if you are employed in your company, that is, if you receive personal income as an entrepreneur and farmer entrepreneur. The aforementioned exemption also applies if you have a company that carries out innovative activities, that is, if you are the founder of a start-up that is employed in the same company.
Incentives for hiring qualified new employees
An employer who establishes an employment relationship with a person who can be considered qualified is released from the obligation to pay calculated and withheld tax from the wages of a qualified newly employed person, for wages paid up to and including December 31, 2022. You can get this incentive if you concluded an employment contract with a qualified newly employed person at any time between January 1, 2020 and December 31, 2022. A qualified newly employed person is considered to be a person who did not have the status of insured employee, i.e. self-employed insured person who is the founder or member of a company, who is employed in the company of which he is the founder or member, and who subsequently acquired that status in the periods defined by law.
Incentive for employment of newly settled persons
If you conclude an indefinite employment contract with a newly settled person, and for a position for which there is a need for the person to have a special professional education and for which there is a need that cannot be easily satisfied on the domestic labor market, you get a tax incentive in the form of a reduced tax base for 70%.
A newly settled person is considered a person who:
1) in the period of 24 months preceding the day of conclusion of the employment contract, he did not mainly reside in the territory of the Republic, or
2) at the time of conclusion of the employment contract with is less than 40 years of age, and who in the period of 12 months preceding the conclusion of the employment contract predominantly stayed outside the territory of the Republic for further education, i.e. professional development.
In addition to the mentioned incentive, in the middle of last year, the Government of the Republic of Serbia adopted a decree that provided for new types of incentives for the employment of foreigners. Namely, these are benefits to which domestic companies are entitled for foreigners who were previously employed in a related company, which is not the case with the previously explained benefits that can only be used by an employer resident in Serbia.
The incentive is reflected in the refund of 70% of calculated and paid income tax and 100% of calculated and paid contributions for mandatory pension and disability insurance. In order to be entitled to this benefit, the salary of an employed foreigner must be greater than 300,000 dinars, as well as that the employer did not use and does not use the above-mentioned benefits for the employment of newly settled persons.
It is clear that the fulfillment of tax obligations is key to the optimization of your business and its development, which is why it is of great importance to have a reliable partner on the way to fulfilling all obligations. If you have any doubts regarding the compliance of your business with legal regulations in this area, contact us via our contact form.
This article is for informational purposes only and does not constitute legal advice. If you need additional information regarding the topic in question, please feel free to contact us by email at office@ncrlawyers.com or by phone at +381677049551.
