COMPLIANCE OF CORPORATE PROFIT TAX LAW WITH … · COMPLIANCE OF CORPORATE PROFIT TAX LAW ... - a division by formation of two or more new companies ... - Liquidation rest,

THE REPUBLIC OF SERBIA NEGOTIATION CHAPTER 16 - TAXATION

COMPLIANCE OF

CORPORATE PROFIT TAX LAW

WITH THE EUROPEAN UNION ACQUIS

CONTENT

(1/2)

1. European Union Acquis

2. Legislation of the Republic of Serbia

3. Compliance with the Directive 2009/133/ЕC

3.1. Introduction

3.2. Status changes – reorganization of companies

3.3. Types of status changes

3.4. Taxation in case of status changes

3.5. Transfer of assets as a form of investment in a company and the

taxation of that transfer

3.6. Taxation in case of exchange of shares or holding in capital

4. Compliance with the Directive 2011/96/ЕU

4.1. Terms relevant for the application of rules on taxation of distribution

of profits

4.2. Imposing withholding tax

4.3. Imposing corporate profit tax

4.4. Tax credit

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CONTENT

(2/2)

5. Compliance with the Directive 2003/49/ЕC

5.1. Terms relevant to the application of rules on taxation of interest and

royalties


5.3. Tax credit

6. Compliance with the Convention 90/436/EEC

6.1. Taxation of the profit of associated persons

6.2. Transfer prices

6.3. Profit of a permanent establishment

6.4. Mutual agreement procedure

6.5. Exchange of notices

7. Code of conduct (business taxation)

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1. EUROPEAN UNION ACQUIS

• Treaty on the Functioning of the EU

• Council Directive 2009/133/EC of 19 October 2009 on the common system of

taxation applicable to mergers, divisions, partial divisions, transfers of assets and

exchanges of shares concerning companies of different Member States and to the

transfer of the registered office of an SE or SCE between Member States

• Council Directive 2011/96/EU of 30 November 2011 on the common system of

taxation applicable in the case of parent companies and subsidiaries of different

Member States

• Council Directive 2003/49/EC on a common system of taxation applicable to

interest and royalty payments made between associated companies of different

Member States

• Convention 90/436/EEC on the elimination of double taxation in connection with

the adjustment of profits of associated enterprises

• Code of conduct (business taxation)

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2. LEGISLATION OF THE REPUBLIC OF SERBIA

• Corporate Profit Tax Law („Official Gazette of the Republic of Serbia”, No. 25/01,

80/02 – other law, 80/02, 43/03, 84/04, 18/10, 101/11, 119/12, 47/13, 108/13, 68/14

– other law and 142/14 – hereinafter: the Law)

• Bylaw regulations governing certain provisions of the Law

• Other regulations governing certain issues directly related to this Law (e.g.

company law, tax procedure and tax administration law, the law on royalties)

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3. COMPLIANCE WITH THE DIRECTIVE 2009/133/ЕC

3.1. Introduction

• Definitions of transactions that lead to changes in the ownership of a company and

that are governed by the Directive 2009/133/ЕC, are not included in this Law.

• Tax treatment of transactions that lead to changes in the ownership of a company is

governed by this Law, while the definitions of those transactions are defined in the

Company Law („Official Gazette of the RS”, No. 36/11, 99/11, 83/14-other law and

5/15) and other relevant regulations.

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3.2. Status changes – reorganization of companies

• The Company Law governs status changes of companies and types of those changes.

• Status change shall be understood to mean the reorganization of a company in which a

transferring company transfers its assets and liabilities on another company (receiving

company), where its members acquire holdings or shares in the receiving company in

proportion to their holdings or shares in the transferring company, unless every member of the

transferring company agrees that exchange of holdings or shares within the status change is

done in different proportion or that they use their right to payment instead of acquiring

holdings or shares in the receiving company.

• A member of the transferring company may be paid in cash as well, but the total amount of

those payments to all members of the transferring company must not exceed the amount of

10% of the total nominal value of the holding or shares acquired by the members of

transferring company, or 10% of the total accounting value of those shares, in the absence of a

nominal value.

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3.3. Types of status changes

• Acquisition

• Merger

• Division

- a division by formation of two or more new companies

- a division by acquisition

- mixed division

• Separation

- a separation by formation of one or more new companies

- a separation by acquisition

- mixed separation

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(1/2)

1) The deferral of the taxation of the capital gains

• Status changes are possible with resident companies.

• Capital gain shall be subject to taxation when a legal entity which acquired assets by a status

change transfers those assets with a fee – sells those assets.

• Capital gain shall be calculated as a difference of the sale price and the acquisition price of the

assets paid by the legal entity that transferred those assets by a status change to another legal

entity, and adjusted in a manner stipulated by the Law, from the day of acquisition until the

day of sale.

• The condition for the deferral of taxation of the capital gains is that the owner of the legal

entity transferring the assets by a status change was given a compensation in the form of

shares in the legal entity acquiring the asset, as well as a possible cash payment, the amount

of which not exceeding 10% of the nominal value of the shares or holdings acquired in that

way.

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(2/2)

2) Transfer of losses

• The use of the tax facility of transfer of losses from the previous taxation periods shall not

stop in case of status changes.

• In case of status change of division or separation, the transfer of losses shall be divided

proportionally between the participants in the status change.

3) Transfer of reserves and reservations

At the moment of a status change, the receiving company takes over unused reserves and

reservations of the transferring company (taxation shall not be applied at that moment).

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3.5. Transfer of assets as a form of investment in a company and the

taxation of that transfer

• According to the Company Law, the investments in a company may be

monetary and non-monetary.

• Introducing a non-monetary asset in a company may lead to taxation of

capital gain.

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3.6. Taxation in case of exchange of shares or holdings in capital

• Exchange of shares or holdings implies the transfer of assets with a fee.

• In case there exists a positive difference between the market value of the

acquired shares or holdings and the acquisition price of shares or holdings

given in exchange, capital gain shall be determined.

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4. COMPLIANCE WITH THE DIRECTIVE 2011/96/ЕU

4.1. Terms relevant for the application of rules on taxation of distribution

of profits

• Parent legal entity – a resident legal entity owning shares or holding in capital of other non-

resident legal entities, under conditions stipulated by the Law

• Subsidiary - a non-resident legal entity the capital of which the parent legal entity holds

under the conditions stipulated by the Law

• Dividend

- income of shareholders earned from the profit of a joint-stock company

- Liquidation rest, the surplus of division supply of money or non-monetary assets, higher than

the value of invested capital distributed to the members of the company which has just ended the

liquidation proceeding or concluded the bankruptcy proceeding.

• A share in profit – income of a member of a limited liability company, limited partnership or partnership, arising from the profit of those companies.

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• In case when a resident legal entity pays up the dividends or profit share to its

parent legal entity – non-resident of the Republic of Serbia, withholding tax shall be

calculated and collected, at the 20% interest rate, unless an international treaty on

eliminating double taxation envisages otherwise.

• In case when a resident legal entity pays up the dividends or profit share to its

parent legal entity – resident of the Republic of Serbia, no withholding tax shall be

calculated or collected.

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4. COMPLIANCE WITH THE DIRECTIVE 2011/96/EU

4.3. Imposing corporate profit tax

• The income of a resident legal entity from dividends or profit share of another

resident legal entity shall not be included in the tax base.

• Income of a resident parent legal entity from dividends or profit share of a

nonresident subsidiary shall be included in the tax base of a parent legal entity

which, in that case, is entitled to tax credit.

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4.4. Tax credit

• Profit tax of a parent legal entity shall be reduced for the amount of profit tax that

its non-resident subsidiary paid in another state for profit which dividends have

been paid, as well as withholding tax that the non-resident subsidiary paid in

another state for such paid dividends.

• Condition for the use of tax credit

• Transfer of unused tax credit

• If conditions have not been met – tax credit may be used for the reduction of

computed tax of a parent resident legal entity in the amount of withholding tax paid

in another state, and maximum up to the amount which would be computed by

implementing tax rate stipulated by the Law on the base equivalent to the amount of

40% of incomes from dividends or profit share.

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5.1. Terms relevant for the implementation of rules on taxation of interests

and royalty payments

• Interest - contracted capital revenue

• Royalty– payment as a consideration for the use of copyrights or similar rights and

industrial property rights

• Copyrights, similar rights and industrial property rights are defined by special

regulations.

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• Withholding tax shall be computed and paid on the income of a non-resident legal

entity arising from interests and royalties earned by a resident legal entity, at the

20% interest rate, unless an agreement on eliminating double taxation stipulates

otherwise. The incomes of legal entities falling within the jurisdiction of a

preferential tax system, withholding tax shall be computed and paid at 25% interest

rate.

• Exception – income arising from interests from debt securities issued by the

Republic of Serbia, autonomous province or local government or the National Bank

of Serbia.

• Tax rate shall be equal for associated and non-associated entities.

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5.3. Tax credit

• Any resident legal entity which earns incomes in another state from

interests and royalties that withholding tax has been paid on in that other

state shall be entitled to tax credit.

• The amount of tax credit – the amount of withholding tax paid, and up to

the amount which would be computed by implementation of tax rate

stipulated by the Law (15%) on the base equivalent to the amount of 40%

of incomes earned from interests/royalties.

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6. COMPLIANCE WITH THE CONVENTION 90/436/ЕЕC

6.1. Taxation of the profit of associated entities

• In the agreements on elimination of double taxation – there is a match with the

decisions from OECD Model Convention.

• The Law governs:

- adjustment of incomes from the transactions between associated entities

(transfer price), by applying methods based on sources of the Organization for

Economic Cooperation and Development (OECD);

- elimination of double taxation of the profit of a permanent establishment of

a resident taxpayer which has been earned in other state.

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6.2. Transfer prices

• Transfer price shall be understood to mean the price that comes into being in connection with

transactions involving assets or making commitments among associated persons.

• A person associated with a taxpayer shall be understood to mean an individual or legal entity

in whose relations with the taxpayer, there is a possibility of exercising control over or

exerting considerable influence on business decisions.

• Tax base shall include:

- the amount of positive difference between the incomes arising from the transaction at the

price determined by applying ‘arm’s length’ principle and the incomes arising from that

transaction made at a transfer price;

- the amount of positive difference between the expenditures arising from the transaction at

the transfer price and the price determined by applying ‘arm’s length’ principle.

• Stipulated obligations also refer to the transactions between a permanent establishment of a

non-resident taxpayer and its non-resident head office.

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6.3. Profit of a permanent establishment

• A resident taxpayer that earns incomes through a permanent establishment

in another state, on which tax has been paid in that state, on the account of

corporate profit tax paid, tax credit shall be approved in the amount of

corporate profit tax paid in that state.

• Tax credit may not be higher than the amount that would be computed by

applying the provisions of the Law on corporate profit earned abroad.

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6.4. Mutual agreement procedure

• The Law does not govern the procedure of mutual agreement for

eliminating double taxation.

• The procedure of mutual agreement for eliminating double taxation and

related to the adjustment of incomes of associated legal entities, which is

envisaged in the treaties on eliminating double taxation, matches with

OECD Model Convention.

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6.5. Exchange of notices

• Exchange of notices between the competent authorities of the states whose residents

are associated legal entities is not set forth by the Law.

• Exchange of notices is defined in treaties on eliminating double taxation, and the

tax procedure and tax administration law.

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7. CODE OF CONDUCT (BUSINESS TAXATION)

• Corporate profit tax rate shall be 15% for all corporate profit taxpayers.

• Tax base shall be determined in the fiscal balance sheet by adjusting incomes and

expenditures from the income statement which has been drawn up in accordance

with the IAS, IFRS and accounting regulations.

• Tax incentives may only be introduced by the Law.

• The Law stipulates:

- tax exemptions on the base of fixed assets investments with employing additional

workers;

- tax exemptions for non-profit organizations;

- tax exemptions for vocational training, professional rehabilitation and employing

disabled persons.

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FURTHER STEPS

Since the Law is only partially in compliance with the directives of the EU,

and to the aim of complete harmonization in the field of direct taxation, the

regulations governing corporate profit tax should be brought, in the

following period, into further compliance with:

● the Directive 2009/133/ЕC;

● the Directive 2011/96/ЕU;

● the Directive 2003/49/ЕC.

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Thank you for your attention!

Questions?

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COMPLIANCE OF CORPORATE PROFIT TAX LAW WITH … · COMPLIANCE OF CORPORATE PROFIT TAX LAW ... - a division by formation of two or more new companies ... - Liquidation rest,