Tax Incentives in Serbia Published by Serbian Investment and Export Promotion Agency Terazije 23, 7th Floor 11000 Belgrade Phone + 381 11 32 48 040 Fax + 381 11 32 48 227 E-mail [email protected] www.siepa.sr.gov.yu Reviewed by PriceWaterhouseCoopers Copy right © April 2002 by SIEPA TAX INCENTIVES SUMMARY There are many tax incentives in Serbia with the prime goal of encouraging investment, speeding the development of underdeveloped regions and facilitating employment opportunities. The available tax incentives are: 1. Carrying forward of losses. 2. Accelerated amortisation of certain fixed assets. 3. Tax exemptions: for concessions; for employment of disabled persons; for non-profit entities (if the difference between revenues and expenses does not exceed YUD 300.000). 4. Tax credits: for Serbian company’s profit in a branch located in an underdeveloped regions of Serbia; for investment in fixed assets (tax reduction can be 10% of the investment but not to exceed 50% of the tax due); for investment in fixed assets in small companies; for the employment of new employees on permanent employment contract (the tax reduction is 40% of gross salary). The Corporate Profit Tax Act sets a uniform tax rate of 20% – a favourable rate for the region. Below is a brief overview of the existing tax incentives in Serbia. 1. CARRYING FORWARD OF LOSSES Losses generated from businesses, financial and non-business transactions, excluding capital losses, can be carried forward for up to five subsequent tax periods to offset future taxable income. This relief does not cease if a company status changes (e.g. in cases of mergers and acquisitions). 2. ACCELERATED DEPRECIATION Taxpayer has the right to accelerated depreciation of fixed asset at rates up to 25% higher than the prescribed ones. This relief is provided for fixed assets serving for the purposes of air-pollution prevention, water and soil pollution prevention, noise control, energy saving, forestation and collection and utilization of waste as industrial raw materials and fuels; science research, education and staff training. The right to accelerated depreciation is also applicable in the case of computer hardware. 2 3. TAX EXEMPTIONS Corporate Profit Act determines the cases when enterprises are to be exempt from profit tax. Tax Exemptions for Non-Profit Organizations Non-profit organisations are granted tax exemption under the following conditions: 1) that income does not exceed YUD 300,000 for the year for which the right to exemption is granted, 2) that the non-profit organization does not distribute the thus generated income to its founders, members, executives, employees or persons associated with them; 3) that the salaries paid to employees, executives and persons associated with them are not higher than twice the average salary paid in the business area to which that non-profit organization belongs; 4) that the non-profit organization does not distribute its assets in favour of its founders, members, executives, employees or persons associated with them. This right does not apply to non-profit organizations which enjoy a monopolistic or dominating position on the market. Tax Exemptions for Concessions A foreign investor can alone or together with foreign or domestic investors establish a company or purchase a share of an existing company. A concession may be granted to the foreign investor for using natural resources or goods in general use or performing activities of general interest. It can be granted for the foreign investor to build, operate and transfer certain projects, production plant or capacity as well as infrastructure or communication facilities. Profit arising from concession activities is exempt from taxation for a period of 5 years. Tax Exemptions for Employment of Disabled Persons The tax liability for company specialised for rehabilitation of disabled persons is decreased proportionally to the participation of disabled persons in total number of employees. 4. TAX CREDITS Company Branch in an Underdeveloped Region A Serbian company with a newly opened branch in an underdeveloped region of Serbia has a right to decrease its tax liability proportionally to the participation of the branch’s profit in total profit for a period of two years. The single condition for utilizing this form of tax reduction (i.e. the tax credit) is to keep separate books for the newly established operating unit. 3 In order to aid the reader, the Appendix holds a list of municipalities/towns classified as underdeveloped and a map of Serbia with their locations. Investment in Fixed Assets The tax due can be reduced in the amount of 10% of the investment in fixed assets for the respective tax period. This reduction cannot be more than 50% of the total tax liability. If not used entirely in one year this tax credit can be carried forward for a maximum period of five years. In each year of this period, the tax credit related to the investment made in that year shall be applied first, and after that the carried forward tax credits, up to the prescribed limit. The following fixed assets are not exempt: 1- Passenger cars, other than cars intended for taxi service, rent-a-car services, driving schools and special vehicles with built-in appliances for transport of patients; 2- Furniture, other than the furniture intended for furnishing hotels, motels, restaurants and holiday camps for young, children and workers; carpeting; 3- Works of fine and applied arts and interior decoration items; and tools and inventory subject to calculated writing off. If the fixed assets are sold before the time limit of three years from the date of acquisition, the taxpayer looses the right to tax credit and has to pay the unpaid tax, which will be indexed by the retail price growth rate as published by the republic statistics authority. Also, the taxpayer has to report the sale of fixed assets to the competent tax office within five days from the transfer of such assets. Employment of New Employees Tax credit is recognised for a period of two years from the date of employment, under condition that the company does not reduce the number of employees in that period, as well as in the period of 12 months prior to the date of employment. The term “reduction of the number of employees” means: (1) termination of an employee's employment by his own will in conformity with the regulations dealing with labour relations, or (2) by the notice of termination of employment contract given by the employer. Investing in Fixed Assets of Small Enterprises If a taxpayer which is classified as a small enterprise (pursuant to the Accounting Act) invests in its fixed assets it is entitled to a tax credit amounting to 30% of the investment, under condition that the reduction is not exceeding 70% of the tax due. 4 WHY FOREIGN INVESTORS INCREASINGLY CHOOSE SERBIA? Starting with the uniform corporate tax rate of 20%, which is one of the lowest corporate tax rates in Europe, Serbia offers the potential investor several other important forms of tax relief. As can be seen in the table below, when investments are made into fixed assets, branches opened in underdeveloped regions and new employees employed on a permanent basis, the effective tax rate becomes 16.5%, placing it among the very lowest tax rates in the region. Also, by the new Foreign Investment Law, investors are exempt from customs and other import duties when importing equipment related to investments. The newly implemented Labour Law incorporating European labour norms and standards along with the other laws creates a truly investor friendly environment. The skilled workforce, good infrastructure, as well as Serbia’s favourable geographical position and other natural resources, should definitely make Serbia your first choice. TABLE - EXAMPLE OF TAX CREDIT CALCULATION AND TOTAL REDUCTION In YUD Steps in Calculating Profit Tax Liability Amounts 1. Tax base1 10,000,000.00 2. Profit tax liability, before application of tax credits (20% x 1.) 2,000,000.00 3. Tax credit on the base of investment in fixed assets2 a) amount of investment 1,100.000,00 b) tax credit (10% x a) 110,000.003 4. Tax credit on the base of newly opened branch in an undeveloped region of the Republic of Serbia (e.g. Undeveloped Municipality) a) percentage of participation in total profits of the company 5% b) tax credit (5% x 2) 100,000.004 5. Tax credit on the base of new employees a) total gross salary payment 350,000.00 b) tax credit (40% x a) 140,000.005 6. Total profit tax credit (3.b+4.b+5.b) 350,000.00 7. Profit tax liability after application of tax credits (2. – 6.) 1,650,000.00 8. Effective tax rate (7./1.) x 100 16.5% 1 After all necessary adjustments in Tax balance sheet, prescribed by the Profit Tax Act 2 Small companies can have tax credits up to 30% of investment provided that the consequent reduction of the tax liability is not bigger than 70% of the initial tax liability that existed before application of tax credit. 3 1,1% of taxable base. 4 1% of taxable base. 5 1,4% of taxable base. 5 APPENDIX 1. LIST OF RELEVANT LAWS 1. Corporate Profit Law, Official Gazette of the Republic of Serbia, No. 25/2001 2. Law on the Underdeveloped Regions of the Republic of Serbia for the Period until 2005, Official Gazette of the Republic of Serbia, No. 53/95 3. Concessions Act, Official Gazette of the Republic of Serbia, Nos. 20/97, 22/97 and 25/97. 2. TABLE OF INHABITED UNDERDEVELOPED REGIONS MUNICIPALITY INHABITED PLACE 1. ALEKSANDROVAC Gornji Stupanj, Latkovac, Pleš, Ploča, Rataje, Rogavčina; 2.