Serbia: CIT Law News

1. August 2019 | Reading Time: 6 Min

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Tax & Finance News from our local experts from Serbia: CIT Law

1. New Rulebook on exemption of qualified income from the CIT base

The new Rulebook was published in the Official Gazette of the Republic of Serbia No. 50/2019 dated 9 July 2019. This newsletter examines some of the key novelties that the Rulebook brings, such as:

The Rulebook entered into force on 20 July 2019 and will be applied for determination of CIT liability for FY 2019.

The Rulebook further clarifies the application of Article 25b of the CIT Law. It prescribes that the qualified income generated by the taxpayer, on the basis of a deposited copyright or related rights (“copyright”) or invention, may be excluded from the tax base in the amount of 80%, under certain conditions.

The right to exclude qualified income from the tax base has a taxpayer who is a holder of deposited copyright and who generates an income on that basis. Taxpayer should deposit the copyright with the competent authorities or submit an application for the registration of the invention, no later than upon expiration of the tax period in which it first applies the CIT Law provision on exemption of qualified income from the CIT base.

1.1 Determination of Qualified Income

Qualified income is determined for the tax period in the following way: the amount of total income generated from a deposited copyright or invention, should be decreased by the amount of qualified expenses and then multiplied by the percentage of the share of qualified expenses in the total expenses incurred in relation to that copyright or invention. Determined qualified income may be excluded from the CIT base in the amount of 80%.

1.2 Determination of Qualified Expenses

Qualified expenses are consisted from the total historical or current tax-deductible expenses of R&D activities related to the creation of a deposited copyright or invention. Determination of expenses related to R&D activities should be done in accordance with the provisions of the Rulebook on exercise of the right to double recognition of research and development expenses in the tax balance, regardless whether the taxpayer applies this tax relief, or not.

In case that a deposited copyright is acquired by status change (merger, demerger or spin-off) or in-kind contribution to the equity, the taxpayer takes into account the qualifying expenses of the transferor.

The special rules of determination of qualified expenses apply for taxpayer who have deposited the copyright/submitted an application for the registration of the invention, after 1 January 2019, and those who, on 31 December 2018, had in its accounting records a fixed asset, asset in progress, intangible property or generated revenues from the copyright/invention. The amount of historical tax recognized expenses incurred before 1 January 2019 is determined according the following rules:

  • in the amount of 60% of income of the deposited copyright or the invention, in the first tax period in which this tax relief is used;
  • in the amount of 40% of income of the deposited copyright or the invention, in the second tax period in which this tax relief is used;
  • in the amount of 20% of income of the deposited copyright or the invention, in the first tax period in which this tax relief is used.

1.3 Determination of Total Expenses

Total expenses are total qualified expenses increased by other expenses (such as, expenses related to R&D activities incurred against non-residents and a part of expenses from transactions with related parties exceeding the “arm’s length“ principle, etc.). If these expenses have not entirely been incurred for the deposited copyright/invention, but also for other purposes of the taxpayer’s business activity, the expenses related to the copyright or the invention should be included in the total expenses on pro rata basis.

In order for the qualified income to be excluded, taxpayer should have in place an appropriate documentation that should be prepared separately for each copyright/invention, in each tax period in which the exclusion was done. Documentation include confirmation from the authority that the copyright has been deposited, confirmation on submitted application for registration of the invention, records on income of generated on the basis of compensation for the exploitation of the deposited copyright/invention, record of the total R&D costs related to the creation of the deposited copyright/invention, etc.

2. New Rulebook on exercise of the right to tax credit based on investment in a newly established company that performs innovative business activity

The new Rulebook has been published in the Official Gazette of the Republic of Serbia No. 50/2019 dated 9 July 2019. This newsletter examines some of the key novelties for the Serbian CIT Law that the Rulebook brings, such as:

The Rulebook entered into force on 20 July 2019 and will be applied for determination of CIT liability for FY 2019.

2.1 CIT: Investing share capital in a newly established company

In accordance with the CIT Law, a taxpayer that invests in the share capital of a newly established company that performs innovative business activity (“the newly established company”) will be entitled to use a tax credit in the amount of 30% of the investment made, but under certain conditions which are set out in this Rulebook. The taxpayer is vested the right to use a tax credit 3 (three) years after the investment, but under the condition that it did not reduce its investment in a newly established company in such period.

In order to exercise its right, a taxpayer should submit the following documentation, along with the CIT return for the year of the investment:

  • UID form – The statement on investment in innovative business activity; and
  • UID 1 form – The statement on fulfilment of conditions by a newly established company that performs innovative business activity.

2.2 Conditions for the Tax Credit

By submitting the UID form, a taxpayer confirms that the following conditions are met for obtaining a tax credit:

  • that the investment was made in a newly established company that performs innovative business activity;
  • that before the investment, a taxpayer, independently or with all related parties, did not own more than 25% shares, i.e. voting rights in a newly established company; and
  • that investment was carried out by paying in share capital of a newly established company (as opposed to merely subscribing for share capital).

By submitting the UID 1 form (that has to be signed and stamped by the legal representative of the company in which investment was made), a taxpayer confirms that a newly established company complies with the conditions prescribed by the CIT Law. These conditions are related to the amount of annual revenue of a newly established company, center of business activity, dividend distribution etc.

After all conditions for obtaining tax credit are met, a taxpayer should submit UID 2 form – The statement on fulfilment of conditions by a newly established company that performs innovative business activity (that has to be signed and stamped by the legal representative of the company in which investment was made). By this form it is confirmed that a newly established company complies with the conditions related to level of R&D expenses, structure of employees and ownership over deposited copyrights.

Final amount of tax credit available for the reduction of the CIT liability is determined in the PK 5 form – Tax credit for investment in the share capital of newly established company that performs innovative business activity for period from ___ to ___ 20__.

 All abovementioned forms should be submitted electronically.

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