Tax Alert, July 2019
Rulebook on conditions and manner for obtaining the right to deduct expenses directly related to research and development activities in tax balance sheet in the double amount
On 9 July 2019, Minister of finance has adopted the Rulebook on conditions and manner for obtaining the right to deduct expenses directly related to research and development activities in tax balance sheet in the double amount (hereinafter: “Rulebook”) which more closely defines the application of Article 22g of the Corporate Income Tax Law, and defines:
- which costs are deemed as costs directly related to R&D,
- the manner of deduction of costs directly related to R&D in double amounts,
- conditions that should to be fulfilled in order to ensure that R&D project is deemed as undertaken in the territory of the Republic of Serbia,
- the documentation that should submitted for each individual project together with the tax balance sheet,
- the manner of keeping records related to R&D expenses.
Rulebook comes into force on 20 July 2019, and is applicable to the corporate income tax calculation for 2019, i.e. to the tax period starting in 2019.
Following expenses are particularly deemed as R&D expenses:
1. salary of the employees engaged in R&D activities;
2. costs of material directly related to R&D activities;
3. costs related to the purchase of intangible assets, as well as costs related to rights to use intangible assets (copyrights, patents, etc.) directly related to R&D activities;
4. costs related to purchase of property, plant, equipment and biological assets that are directly used for R&D activities;
5. costs of lease of property, plant, equipment and biological assets that are directly used for R&D activities;
6. costs related to obtained opinions of experts, advisory services, as well as costs related to transfer of specific knowledge and skills (know-how), obtained for direct needs of R&D activities, except for services provided by related entities;
7. costs related to legal protection of intellectual property rights (copyright and related rights and patents);
8. costs of borrowing, arising from borrowing funds for financing the R&D activities;
9. costs of production services obtained for the R&D activities.
On the other side, Rulebook prescribes that R&D costs shall not include sale costs (cost of marketing and advertising of new product or service, resulting from R&D activities), administrative and other general costs that cannot be directly linked to R&D, costs of employee education and regular maintenance of fixed assets used for R&D activities, or assets resulting from investments made in development phase.
R&D expenditures are tax deductible in the amount deducted in P&L, in accordance with the accounting rules, and are then additionally included in tax balance sheet of tax period when these have arisen (practically, these expenditures are recognized in their double amount for the purpose of determining corporate income tax base).
When it comes to R&D expenditures that, according to accounting rules, are not recognized as expenses, but as assets (fixed assets), these are deducted in tax balance sheet in period when acquired, in the amount of their purchase price, i.e., for rented assets (also recognized as fixed assets) in the amount that equals to total rents payable by taxpayer during the renting period. The same treatment applies to subsequent investments made in assets resulting from R&D activities that are to be included in tax balance sheet of tax period when completed, in their full amount. Such method of their recognition does not affect recognition of their depreciation expenses, i.e. their impairment.
It should be noted that stated R&D expenditures, which are recognized as assets, are to be included in tax balance sheet of taxpayer in the amounts determined according to percentage of their utilization for R&D activities. That percentage should be determined in tax period when such asset is acquired/rented, and the taxpayer is liable to use that percent in period of 10 years for real estate and 5 years for other fixed assets. If taxpayer, prior to expiry of these periods, reduces determined percentage by more than 20%, it has the obligation to increase its corporate income tax base for that period by the amount determined using formula prescribed by the Rulebook.
The Rulebook also determines the manner in which the double deduction from the tax base is applicable to existing fixed assets that are used for R&D activities.
Following provisions on Rulebook, the project is deemed as undertaken in the Republic of Serbia if at least 90% of total employees engaged with such project perform their activities on the territory of the Republic of Serbia (except in cases when dislocation of project activities is caused by special physical, geographical, i.e. natural resources not available on the territory of Republic of Serbia).
Taxpayer that uses the R&D deduction, is liable to submit, together with tax balance sheet, for each project separately: description (specification) of the project, with highlighted purpose of the project, its planned phases and activities within each of these phases, records on time spent by each employee on that particular project and conclusion. These documents are submitted in hard copy. Moreover, at the moment of tax return submission, taxpayer should possess prescribed additional project related documentation (budget, purchase plan, opinions provided by experts in charge of the project etc.)
Rulebook prescribes the obligation of taxpayer to maintain records on the amounts of R&D expenses for each project separately, through special tax analytical records for expenditures related to R&D activities (e.g. separate tax analytical records for salaries and other personnel costs related to employees whose activities are related to R&D, in proportion in which their activities are related to R&D activities).