At the end of 2016 the Serbian Parliament adopted changes to Serbian tax laws, introducing a number of important changes in the area of VAT, excise duties and general tax procedures. Amendments to the laws governing these areas were adopted at the very end of 2016 – on the 28th of December 2016.
In addition to the changes made regarding tax laws, some important changes have been made in the area of criminal prosecution of tax avoidance through amendments to the Serbian Criminal Code.
A number of new double tax treaties will start to apply in 2017. The Serbian Ministry of Finance issued an important opinion concerning taxation of on-line advertising services.
Amendments to VAT law
The most important changes introduced by the latest amendments to the VAT law concern the obligation of foreign suppliers to register for VAT in Serbia, and the place of supply rules which have been remodelled completely.
The VAT Law now prescribes that foreign suppliers are required to register for VAT in Serbia and appoint their VAT representative only if they make taxable supplies in Serbia to non-taxable persons. In another words, the obligation to register for VAT now exists only if a taxable supply is made to a person who cannot reemit VAT. In this case the obligation applies irrespectively of the amount of annual turnover of the foreign supplier – thresholds for mandatory registration which apply to resident taxpayers (RSD 8 million) do not apply to foreign suppliers.
Failure to register for VAT by a foreign supplier is sanctioned as a misdemeanour punishable by a fine of up to RSD 2 million (app. EUR 18k).
Another important change introduced by the latest VAT amendments is the complete remodelling of the rules governing the place of supply of services. The purpose of these changes was to align Serbian place of supply rules with EU rules in this area.
The general place of supply rule now depends on whether a service is supplied to a taxable or to a non-taxable person: if the service is supplied to a taxable person, the place of supply is the place where the recipient of the service is established. If the service is supplied to a non-taxable person, the place of supply is the place where the supplier of the service is established.
This is the general rule. There are a number of exceptions prescribed for specific types of services. Services such as consulting, services supplied electronically, telecommunication services and other services listed in the law are deemed to be supplied where the recipient of the service is established, regardless of whether the recipient of the service is a non-taxable person. Services related to immovable property are deemed supplied where the property is located. Services concerning cultural, entertainment and sport events are deemed to be supplied in the place where the service was actually provided.
The amendments introduce a specific definition of the taxable person which applies only for the purpose of application of the place of supply rules. There are two different definitions for situations where a service is supplied by a Serbian supplier: if the service is supplied to a foreign customer, such foreign customer will be deemed to be a taxable person if the customer is registered for a consumption tax in the country of the customer's registered seat. If a service is supplied by a foreign supplier to a Serbian customer, than the Serbian customer will be deemed a taxable person for the purpose of place of supply rules if they conduct a business activity on a permanent basis irrespective of the purpose of such business activity.
Overall, it seems that the new place of supply rules, coupled with the introduction of mandatory registration of foreign suppliers for VAT will make the assessment of VAT on cross-border supplies much more complicated then under the old rules.
Other changes introduced by the latest amendments include abolishment of the refund of VAT for babies (food and equipment), which will be replaced by direct subsidies to families with children.
Rules governing the time of supply of electricity, natural gas and heat have been slightly refined and clarified.
The supply of wooden briquettes and pallets is now included in the list of supplies subject to the reduced 10% rate.
Finally, the application of the obligation of registered VAT payers to submit the report on the calculation of VAT is postponed until 2018.
New VAT rules started on the 1st of January 2017, except for rules governing place of supply of services which will start to apply on the 1st of April 2017.
The most important change introduced by the latest amendments to the Law on Tax Procedure and Tax Administration is the shifting of the jurisdiction for the appeal process from the Tax Administration to the Ministry of Finance.
Until now, the power to decide on appeals against resolutions of the Tax Administration was delegated to the Tax Administration. From now on, the Ministry of Finance will decide on the appeals. This is an encouraging change, and we hope that it will bring more independence and justice in the second-instance process. This should also contribute to the greater harmonization of the jurisprudence in tax cases, as the Ministry of Finance is also responsible for the binding opinions on the interpretation of tax laws.
The amendments introduce the possibility for the Tax Administration to issue its resolutions without hearing, if the resolution may be issued on the basis of the information available in public records.
The amendments now prescribe that the Tax Administration to refuse to register any given company for tax, if tax registration was denied to its sister company. It is also prescribed, that companies whose tax identification number has been suspended (because of unsettled tax liabilities) will not be allowed to register and execute any corporate changes with the Serbian Business Registry Agency.
The Ministry of Finance will take over its new responsibilities in the second instance starting from the 1st of July 2017. This is the period in which the Ministry should take over competent personnel and prepare itself for this new assignment. All other changes introduced by the amendments started to apply on the 1st of January 2017.
Amendments to the excise Tax law
Changes introduced in excise taxes concern primarily cigarettes and coffee.
Excise taxes on cigarettes have been increased with an explanation that they should be harmonized with the excise rates in the EU. Currently, the excise tax on cigarettes in Serbia is EUR 54 per 1000 cigarettes, while minimal excise duties in the EU is EUR 90 per 1000 cigarettes.
Minimal amount of excises will be published twice a year, on the 15th of February and the 31st of July each year.
The obligation to pay excise tax on coffee will now include entities involved in the processing, roasting, packaging and other activities carried out for the purpose of coffee production, and not only the importation of coffee, as was the case before. At the same time, the amendments introduced a "mini VAT" system for calculating the excise tax due: each participant in the production chain will have the right to reduce the excise due, proportionate to the amount of excise duties paid to the previous participant in the chain.
Facebook's and Google's advertising services are subject to withholding tax in Serbia
At the end of December 2016, the Serbian Ministry of Finance issued an opinion which stated that services of internet advertising supplied by Facebook and Google to Serbian corporate customers are subject to withholding tax on service income, at the standard tax rate of 20%.
The taxes due may be eliminated on the basis of a double tax treaty, but only if Facebook and Google provide their Serbian customers a certificate of residence by their country of residence (Ireland). Each individual customer must have an original copy of the certificate in their hands to be relieved from the obligation to pay tax. This may be difficult to achieve considering the fact Facebook and Google may have many customers in Serbia.
New Double Tax treaties
Double tax treaties signed over the course of 2015 and 2016, including the treaty with Luxembourg, Armenia and Korea, started to apply on the 1st of January 2017.
Under the treaty with Armenia, interest, dividends, royalties and lease of industrial equipment is subject to be reduced to an 8% withholding tax rate.
Under the treaty with Korea, the withholding tax rate on dividends is 5% if the recipient of the dividend holds at least a 25% share in the company paying the dividend, and 10% in all other cases. Interest is subject to 10% and royalties to 5% withholding tax rates. Same withholding tax rates apply under the treaty with Luxembourg
Under all treaties, capital gains generated from alienation of immovable property and shares in companies whose assets are composed mostly of immoveable assets may be taxed in the country where the immoveable asset is located. Capital gains generated from the sale of other assets may be taxed only in the country of residence of the seller.
The second round of negotiations between Serbia and Israel on the new double tax treaty was held in Belgrade between the 7th and 10th of November 2016. All main provisions of the treaty have been agreed upon and it is expected that the treaty will be signed soon. The interesting feature of this treaty is that this will be the first treaty which will be fully harmonized with BEPS's (Base Erosion and Profit Shifting) action plan.
Changes in the legal definition of Criminal offence of Tax avoidance
On the 23rd of November 2016, the Serbian Parliament adopted amendments to the Criminal Code. Changes made include, amongst others, criminal offence of tax avoidance.
Prosecution of tax avoidance was a matter of much controversy in the recent practice, and some of the changes made by the latest amendments are aimed to address these controversies. Though generally welcome, the scope of changes made are unlikely to bring significant improvements in the prosecution of tax avoidance.
The first, long awaited change is the increase of the threshold for criminal prosecution of tax avoidance. For more than a decade this threshold was set at only RSD 150,000 (less than EUR 1,500). Such a low threshold allowed criminal investigations of minor cases of failure to pay tax, which were often the result of a mere mistake, rather than an actual intent to avoid tax. At the same time, the low threshold exhausted the resources of both the Tax Police and the Office of the Public Prosecutor who have a legal obligation to investigate all cases which may fall under the legal definition of tax avoidance however small, instead of concentrating on high-profile cases of tax avoidance.
After much debate and lobbying, the threshold for criminal prosecution of tax evasion was increased by the latest amendments, but only symbolically: from RSD 150,000 to RSD 500,000 (app. EUR 4,000). Such a low threshold may be a part of the Government's strategy to combat grey economies with more rigorous sanctions in 2017. Nevertheless, this is not very likely to contribute to neither the efficiency nor to the fairness in the prosecution of tax evasion.
The thresholds for the two qualified forms of tax avoidance are not changed and remain at the same level (at RSD 1,500.000 and RSD 7,500.000),
Another important change is that tax avoidance now also includes avoidance to pay tax on illegally earned income. Before the latest amendments, tax avoidance could have been committed (and prosecuted) only with respect to legally earned income. Cases in which a person avoided to pay tax on illegal income were outside the scope of the legal definition of tax avoidance. The result was that the most blatant cases of tax avoidance could not have been prosecuted (such as for avoidance to pay tax and social contributions on salaries paid to illegal workers and similar). The removal of reference to "legal income" from the legal definition of tax avoidance is a welcomed change which should result in a better and fairer prosecution of tax avoidance.
Finally, the legal definition of tax avoidance now includes a clear rule whereby this criminal offence may be committed both in cases in which the offender avoids his/her own taxes, as well as in cases in which the offender's intent was aimed at the avoidance of someone else's taxes.
The sanctions for tax avoidance for the most part remain the same: a fine and imprisonment of six months to five years. Sanctions for the most severe cases of tax avoidance have been slightly increased to a minimum of three years of imprisonment (instead of the previous two). The maximal sentence remains the same – ten years of imprisonment.
The amendments to the Criminal Code enter into force on the 1st of June 2017 whereas the provisions on tax avoidance shall enter into force on the 1st of March 2018.