Serbia signed a Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("MLI"). The MLI should prevent the abuse of domestic tax laws and double taxation treaties ("DTT"), and its provisions shall be accordingly incorporated into the current DTT signed by Serbia.
Serbia signed a double tax treaty with San Marino, and conventions on social security ("SSC") with Romania, China, Russia and Greece.
MLI Starts To Apply
In order for the amendments of the DTTs provided by the MLI to take place, every country, signatory to the MLI, needs to notify depositaries on its choices of MLI mechanisms which will be binding for that country. Those chosen mechanisms will start to apply three months after the notifications were delivered – on the first day of the following month.
Serbia notified the depositaries on its choices on 5 June 2018, meaning that the MLI entered into force in Serbia on 1 October 2018.
The MLI enters into force between the parties to the DTT once the MLI enters into force for both parties to the DTT, where the later date will be considered as the date when the MLI entered into force between both of the parties to the DTT ("Effective Date").
The MLI-amended provisions of the DTTs, regarding withholding taxes for payments to non-residents, will start to apply on the first day of the next calendar year. The provisions of the DTTs amended by the MLI, regarding other taxes, will start to apply within six months as of the Effective Date.
Since the MLI already entered into force for Austria, Poland, Sweden, Slovenia and United Kingdom, the DTTs between Serbia and these countries are considered effectively amended by the MLI as of 1 October 2018. Amendments to the DTTs between Serbia and these countries will start to apply as of 1 January 2019 for withholding taxes for payments to non-residents, and as of 1 April 2019 for other taxes. We expect that the MLI will enter into force with Lithuania and Slovakia during 2019.
The MLI introduced the following mechanisms:
- The income of transparent entities will be treated as the income of a resident of a relevant party, but only to the extent to which such an income may be qualified as the income of a resident of that Contracting Jurisdiction;
- The income of dual-resident entities will be excluded from any relief or exemption provided by such a DTT, if it is not possible to determine whether the entity is a resident of one of the contracting parties;
- The implementation of the „Purpose of the DTTs" preamble, in order to stress that the intention of the treaty is to avoid non-taxation or reduced taxation through tax evasion or avoidance;
- The prevention of treaty abuse, in cases where the purpose of a potentially taxable arrangement or transaction is to avoid taxation under the DTT;
- Dividends will enjoy beneficial treatment under the relevant DTT if the beneficial owner of the income prove that it met ownership conditions provided by DTT throughout a one year period;
- Capital gains from the sale of shares in entities which derive more than 50% of their value from immovable property, located on the territory of a contracting party, shall be taxable on the territory of that contracting party in cases when a 50% threshold is applicable at any time within previous year; and,
- Anti-abusive rules for PEs and mechanisms against the avoidance of the PE status, in order to prevent avoidance of the PE status through commissionaire arrangements, specific activity exemptions or by splitting-up of contracts.
The MLI also introduces new rules on mutual agreement. This agreement allows the entity that considers that the actions of one or both of the contracting parties to the DTT result in taxation which is not in accordance with the DTT, to present its' case before the competent authority of any contracting jurisdiction. Most treaties prescribed that such case was to be presented only before the authority in the state of residence.
DTT Signed With San Marino
Serbia and San Marino signed a DTT on 16 April 2018 in Belgrade. The Law on the Confirmation of the DTT was published by the Serbian National Assembly and adopted by the Assembly on 25 September 2018. It is expected that the DTT will start to apply in San Marino from January 2019.
The DTT introduces a maximum 5% withholding tax rate for dividends paid by a company to its shareholder company directly owning at least 25% of the capital of the company paying the dividends. A maximum of 10% withholding tax rate applies to the payment of dividends, paid to shareholders owning less than 25% of company's capital. Dividends may be regularly taxed in the shareholder's country of residence as well.
Interests and royalties are generally taxable in the country of residence of the company receiving the interests and royalties. Interests and royalties may be also taxable in the country of residence of the company paying the interests and royalties, but such tax may not be calculated at a rate higher than 10%.
The DTT follows the principle of the MLI when it comes to the regulation of capital gains tax. If more than 50% of the value of the company is derived from immovable property within 365 days prior to sale, the sale of shares over such a company may be taxable in the country of residence of the company subject to the sale. In all other cases, the sale of shares is taxable in the seller's country of residence.
Finally, as a consequence of signing the DTT, San Marino will be excluded from the list of countries with a preferential tax regime.
New Conventions On Social Security
The SSC with Romania started to apply as of 1 April 2018. The previous SSC with Romania, dating from 1977, covered only health insurance, while the new SSC covers both health and pension insurance. Under the SSC, employees seconded for work to the other country, as well as individuals conducting their business activity in the other country, stay insured in their home country for the first 24 months of abroad. The insurance period in their home country may be extended for another 24 months upon the mutual agreement of the competent bodies of Romania and Serbia.
Conventions with China, Russia and Greece were also signed recently, and it is expected that they will soon start to apply.
Serbia and China have signed a social security convention on 7 June 2018. SSC is expected to overcome the possible obstacles in correlation to the Serbian and Chinese social security systems and, thus, improve the protection of social security of Chinese expats in Serbia and Serbian expats in China. The SSC prescribes that employees that are seconded to the other country, remain insured in home country for the first 60 months. This period may be extended for an additional 24 months. The convention with China was ratified by the Serbian National Assembly on 26 September 2018. However, China is yet to adopt the SSC, in order to enable its' application.
Serbia also signed a SSC with Russia. The SSC focuses only on contributions for pension insurance and insurance for professional injuries. Under the SSC, employees seconded to the other country, and individuals conducting business activities abroad, remain insured in their home-country for the first 24 months, with possibility of extending that period for an additional 24 months. Serbia ratified the SSC, and Russia's ratification is expected soon to follow.
Furthermore, Serbia signed a SSC with Greece. This SSC covers only the avoidance of double payments concerning the contributions for pension and disability insurance. Employees that are seconded to another country are exempt from paying pension and disability contributions in that country for the first 24 months. This period may be extended by an additional 24 months. Individuals who are conducting business activities in the other contracting country are mandatorily insured in their home-country for the first 12 months of conducting such an activity (the deadline may be extended for an additional 12 months). Individuals who are employed in one country and conduct individual business activities in the other country, remain insured in their country of employment only. The SSC between Serbia and Greece is expected to come into force three months after the parties notify each other on the ratification of the SSC. The parties have not yet notified each other on the ratification of the SSC. However, Serbia ratified the SSC on 29 June 2018, and Greece is expected to follow.