Tax Alert, December 2018
Amendments to the Corporate Income Tax Law
On 7 December 2018 National Assembly of the Republic of Serbia has adopted the amendments to the Corporate Income Tax Law (hereinafter: CIT Law). As stated, the main reason for the amendments is creating more favorable conditions for performing business activities and a better application of the provisions of the CIT Law, where most of the novelties refer to tax incentives intended for knowledge industry and investment in research and development (R&D).
The most significant amendments include:
- change of the method for calculation of tax depreciation,
- suspension of limit for deductibility of marketing expenses,
- tax incentive - deductibility of R&D expenses in the increased amount,
- tax incentive – special tax treatment of IP income,
- tax incentive - tax credit for investments in startup companies,
- tax incentive – exemption of part of the capital gains derived from disposal of IP developed in Serbia from taxation,
- new rules regarding income/expense realized from the concession contract, debt cancelation in line with the reorganization plan and from amendments to the accounting policies;
CIT Law came into force on the 9 December 2018, and it is mostly applicable to the 2019 corporate income tax calculation, except:
- New rules on calculation of tax depreciation shall apply for fixed assets acquired as of 1 January 2019, i.e. as of the first day of tax period starting in the year 2019;
- Provisions on tax incentive related to income realized from registered IP shall apply for the compensation for the right to use the IP registered in the registry of the competent authority as of 1 January 2019;
- Provisions on taxation of the income realized from concession (but not capital gains) and debt cancellation in line with the reorganization plan, shall apply for corporate income tax calculation for 2018;
- Provisions governing tax treatment of accounting policies shall apply for corporate income tax calculation for 2018.
Below is an overview of the most important amendments:
1. Tax depreciation
Amendments to the CIT Law prescribe new rules related to calculation of tax depreciation which shall be applied for fixed assets acquired as of 1 January 2019, while existing provisions, with certain amendments, shall be applicable for depreciation of existing fixed assets. Below is an overview of amendments.
In the following period, it is expected that two rulebooks will be adopted, which should regulate in more detail calculation of tax depreciation in accordance with the old and the new rules. Depreciation rates remain unchanged.
New rules on calculation of tax depreciation
Amendments to the CIT Law introduce new method for calculation of tax depreciation, which shall be applied to fixed assets acquired as of 1 January 2019 (or as of the first day of tax period starting in the year 2019)
- Depreciation of fixed assets is calculated using the straight-line method for all V groups, applied to the base corresponding to purchase value, for each individual asset. In case that fixed assets are acquired during the tax period, depreciation is determined using the straight-line method in proportion to the time from the beginning of calculation of depreciation to the end of tax period.
- If the amount of accounting depreciation is lower than the amount of tax depreciation, only the amount of accounting depreciation will be deductible.
- Fixed assets consisting of movable and immovable parts shall be classified for tax depreciation purpose in accordance with the manner in which they are classified in the taxpayers' books.
- Depreciation of investment properties which are in taxpayer’s books recorded using the fair value method, is calculated by applying the 2.5% rate on the purchase value.
- Depreciation of intangibles is deductible in the amount of accounting depreciation.
Amendments to the existing rules on calculation of tax depreciation
Existing provisions on calculation of tax depreciation are applicable for calculation of depreciation of fixed assets acquired until 31 December 2018 (or on the last day of tax period starting in 2018). For fixed assets from groups II – V existing provisions are applicable for calculation of depreciation of respective assets until 31 December 2028 (or on the last day of tax period starting in 2028).
If closing balance for:
- II group is less than 10%;
- III group is less than 15%;
- IV group is less than 20%;
- V group is less than 30%
as compared to the closing balance determined as at 31 December 2018 (or on the last day of tax period starting in 2018), total balance of the depreciation group will be deductible.
2. Suspension of limit for deductibility of marketing in tax balance
The limit for deductibility of marketing expenses in tax balance is suspended – marketing expenses are deductible in full amount (subject to the general rules on tax deductibility).
3. Tax incentive – R&D Deduction
The new Article 22g introduces new tax incentive which provides that expenses directly related to R&D activities performed in the Republic of Serbia are tax deductible in the double amount.
Research is the original planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes or services before the start of commercial production.
Afore stated is not applicable on research expenses arising with the aim of finding and developing oil, gas or mineral resources in the extractive industry.
Bylaw which would regulate in more detail the application of the tax incentive is expected in the coming period.
4. Tax incentive –Taxation of the income from the IP
New Article 25b of the CIT Law introduces tax incentive for taxpayers who derive income based on the compensation for the use of IP (also applicable to related rights and patents) – i.e. who derive royalty income, with condition that the IP must be registered. Following is the short overview of the provisions:
- Qualified income, realized by the owner of the IP, based on the compensation for the use of registered IP, except compensation for the transfer of all rights on the IP, may be excluded from the tax base in the amount of 80% of such realized income (also applicable to the income from patents), if the taxpayers opts for it;
- Qualified income is excluded from the tax base in the amount decreased by total historical or current tax deductible expenses related to R&D activities which led to the creation of IP in question;
- The percentage of income that could be deemed as qualified is determined in line with the ratio of qualified expenses to total expenses related to the IP.
Taxpayer is obligated to specifically state respective income in the tax balance, as well as to prepare, and at the request of the Tax Administration, submit documentation in a manner and in the form prescribed by the Minister of Finance.
It is expected that a bylaw will be adopted, which would more closely define conditions and manner of exclusion of qualified income from the tax base, including the form and contents of the necessary documentation which should be prepared.
According to the amendments, when it comes to the use of tax credit based on withholding tax paid in a foreign country, taxpayer using this tax incentive can use the tax credit only for the part of IP income included in the tax base.
5. Tax incentive - Tax credit for investments in start-up companies
New Article 50j of the CIT Law introduces tax incentive for taxpayers which are not deemed as performing innovative business activity, based on their investments in start-up companies, i.e. newly established companies performing innovative business activities.
Taxpayer which is not a newly established company performing innovative business activities, and which invests in the share capital of the newly established company performing innovative business activities, has a right to a tax credit in the amount of 30% of such investment.
Tax credit may be used by the taxpayer:
- who before investment, independently or with all related entities, did not own more than 25% of the shares, i.e. voting rights in the newly established company performing innovative business activities in which it invests,
- only based on fully paid in monetary investments that increase the capital of the newly established company performing innovative business activities,
- under the condition that the taxpayer did not decrease its investment continuously for a period of three years from the date of the investment – tax credit can be used for the first time in the tax period following the period in which this condition was fulfilled.
Maximum amount of the tax credit which could be used by the individual taxpayer based on the investment in the newly established company performing innovative business activities amounts to 100,000,000 dinars, while maximum amount of the tax credit, regardless the number of investments, which could be used in one tax period by the taxpayer amounts to 50,000,000 dinars. Exceptionally, maximum amount of the tax credit for the taxpayer who has related entities, is positive difference between maximum amount of tax credit and tax credit on which taxpayer’s related entities have the right based on investment in the same newly established company performing innovation activities, up to the amount of 100,000,000 dinars.
Unused part of tax credit could be carried forward, but not longer than five years.
In order for a company to be deemed as a newly established company performing innovative business activities, such company needs to fulfil the following conditions:
- That no more than 3 years have passed since its establishment
- That its predominant business activity is innovative (as defined by the law governing innovative activities)
- That its annual income does not exceed 500 million dinars – as per the information at the moment of the investment
- That the company did not distribute dividends since the establishment, nor will it distribute dividends in the 3-year period from the moment of the investment
- That the center of its business activities is in Serbia
- That the company was not established through mergers/demergers
- That in every tax period, starting from the period following the period in which the company was established, until fulfilment of conditions for tax credit – R&D expenses represent at least 15% of total expenses or more than 80% of employees are highly qualified or the company is the owner or user of registered IP or patent directly related to innovation activities.
Bylaw which shall in more detail determine the manner of application of this tax incentive is expected.
6. Tax incentive - excluding capital gains realized from disposal of IP developed in the Republic of Serbia from the tax base
The amendments adjust terminology related to taxation of capital gains, in the manner that the term “industrial property” is replaced with the term “intellectual property”, i.e. disposal of IP is the subject of capital gains tax.
In addition, new tax incentive is introduced, which provides that only 20% of capital gains will be included in the tax base, if derived from the transfer of full property rights on:
- registered IP,
- patents, in accordance with the law governing patents.
Capital loss realized from the sale of one right may be offset against taxable amount of capital gains from the sale of other right in the same year, where maximum 20% of the capital loss realized from the transfer of aforementioned rights could be offset against taxable amount of capital gains from the sale of other right in the same year.
7. Taxation of income realized from the concession contract, debt cancellation in line with the reorganization plan and treatment of effects of amendments to the accounting policies
- Income realized from the transfer of nonmonetary assets – operating revenues and capital gains
Taxpayer’s, i.e. concession provider’s, income realized from the transfer of nonmonetary assets without consideration which was, under the concession contract, performed by the private partner, are not included in the tax base in the tax period in which they were recorded, under condition that the estimated value of the concession amounts to at least 50 million euros.
Capital gains arising from the transfer of immovable property to the concession provider, performed by the private partner under the concession contract, are not included in the private partner’s tax base in the tax period in which they were recorded, under condition that the estimated value of the concession amounts to at least 50 million euros.
Capital losses arising from the aforementioned transfer of immovable property cannot be offset against capital gains.
- Income arising from debt cancellation
Taxpayer’s income, in tax period in which it was recorded, realized from the cancellation of taxpayer’s debt towards users of public funds, insolvent banks and towards chambers of commerce, is not included in the tax base when respective debts are included in the pre-prepared reorganization plan confirmed by the effective decision in accordance with the law governing bankruptcy.
- Effects of changes to the accounting policies
Effects of changes to the accounting policies arising from the first application of IAS, i.e. IFRS and IFRS for SME, based on which, in accordance with accounting legislation, the adjustments of certain positions of the balance sheet is performed, are recognized/deductible as income/expenses, starting from the tax period in which respective adjustments were performed. Such income and expenses are recognized/deductible in the tax balance in equal amounts in five tax periods.
8. Tax credit for the capital gains tax paid abroad
The amendments to the Article 53b allow tax credit based on the capital gains tax paid in a foreign country. Namely, resident taxpayer who realized capital gains from the sale of assets prescribed by the Article 27 in foreign country, and paid tax in that country, could decrease calculated corporate income tax in the Republic of Serbia for the amount of tax paid in that other country.
Tax credit cannot be higher than the amount of tax which would be calculated for capital gains in accordance with the CIT Law.
Tax credit cannot be used for tax paid in a foreign country, if applicable double taxation treaty stipulates that capital gains should be taxed exclusively in the Republic of Serbia – therefore, if the taxpayer wishes to use the tax credit, the taxpayer is obliged to apply double taxation treaty provisions.