Significant changes affecting a wide range of companies in Serbia have been introduced via amendments to the provision related to application of withholding tax. Article 40, paragraph 1, item 5 of the Law on Corporate Profit Tax regulates the taxation of services provided by foreign entities by subjecting them to withholding tax. It will apply as of April 1st, 2018.
The long-awaited definition of services that are subject to withholding tax has finally been put in place. This has been an area of great uncertainty among companies who were often unsure about whether or not to pay withholding tax for services received from abroad.
The new Article 40, paragraph 1, item 5 of the Law defines that subject of taxation with withholding tax is the income of foreign legal entities received from domestic (Serbian) legal entities for: - Market research services; - Accounting and auditing services; - Other services in the field of legal and business consulting, regardless of the place where the services are provided or used, or where they will be provided or used.
It was proposed that the Minister of Finance defines in even greater detail the types of services in order to eliminate any doubt as to the application of the regulations.
As a result of the amendment, starting from 1 April 2018, domestic legal entities will not have to calculate and pay withholding tax for services such as, for example, advertising services on Facebook, Google AdWords, goods transportation services through the territory of Serbia, etc. There will be no further requirement of obtaining a tax residence certificate for the purpose of applying bilateral tax treaties on the avoidance of double taxation. The obligation remains solely in respect to tax-subject services: market research, accounting and auditing services and other services in the field of legal and business consulting.
This change applies to all payments made by domestic legal entities to foreign legal entities starting from 1 April, 2018, regardless of whether the service for which the fee is paid was supplied before or after that date. With this in mind, companies should not rush to pay for already performed services, if and when possible, but to consider postponing the payments for after 1 April 2018 if the nature of the supply is exempt from withholding tax under the new rule.