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New Rulings of the Ministry of Finance

Tax Alert, October 2020

During the past period, several rulings of the Ministry of Finance were published, which clarify the application of the provisions of the Law on Value Added Tax, Law on Corporate Income Tax and Accounting Law.

For more detailed questions regarding the application of the rulings on your specific activity and circumstances, you can contact the colleagues from the Tax Department, according to the contact information listed below.

Value Added Tax

Absence of an obligation to compute VAT for the supply of business premises free of charge

Ruling of the Ministry of Finance, no. 011-00-279/2020-04 as of July 9th, 2020

Conclusion from the Ruling: When a VAT payer gives away its business premise - canteen free of charge to the person who will prepare food for the employees of the VAT payer, the VAT payer is not obliged to compute VAT on that basis, considering that these services are provided for business purposes, i.e. in order to reduce its expenditures.

The above-mentioned Ruling is particularly significant for VAT payers who give away business premises free of charge for the purpose of food preparation of their employees, because it determines the nature of such services as services provided free of charge, but for business purposes, in terms of the Law on Value Added Tax.

Absence of the right to deduct input VAT on food and beverage expenses

Ruling of the Ministry of Finance, no. 430-00-00418/2019-04 as of July 29th, 2020

Conclusion from the Ruling: A VAT payer who produces TV commercials has the right to deduct input VAT based on staffing services, services of renting holiday mobile caravans, mobile kitchens, chairs and mobile toilets, used on the sets when shooting TV commercials. However, a VAT payer is not entitled to right to deduct input VAT based on food expenses, including beverage, for employees or other hired persons.

The above-mentioned Ruling is significant for most VAT payers, due to the example of a narrow interpretation of the absence of the right to deduct input VAT on food expenses, including beverage, which does not include mobile kitchens, despite their connection with employees’ nutrition and nutrition of other hired persons.

Determination of a VAT debtor for the supply of goods and services in the case when the disassembly of old and delivery with the installation of new automatic doors is performed

Ruling of the Ministry of Finance, no. 430-00-00257/2020-04 as of July 23rd, 2020

Conclusion from the Ruling: When a VAT payer performs disassembly of old and delivery with the installation of new automatic doors or individual parts for automatic doors (e.g. wings, panels, sliding beams with mechanism, motor, etc.) to another VAT payer, the supply performed is considered to be a supply in the field of construction. This is an activity from the group 43.29 - Other installation works in construction in line with the Classification of Activities.

The above-mentioned Ruling is particularly significant for VAT payers who deal with the installation of doors and installation of carpentry, as well as VAT payers who procure these works.

Right to deduct input VAT based on the invoice in which the place of delivery of the goods was incorrectly stated

Ruling of the Ministry of Finance, no. 011-00-00513/2020-04 as of July 28th, 2020

Conclusion from the Ruling: Information on the place of delivery of goods is not a mandatory element of an invoice or other document that could be used as an invoice. Taking into account the above-mentioned, failure to state or stating an incorrect information on the place of delivery of goods does not affect the exercise of the right to deduct input VAT, prescribed by the Law on Value Added Tax.

The above-mentioned Ruling is significant for most VAT payers because it points out that the (non) existence or incorrectness of invoice element, which is not prescribed by the Law on Value Added Tax, cannot affect the right to deduct input VAT.

Determination of the date of supply for technical protection services

Ruling of the Ministry of Finance, no. 011-00-00450/2020-04 as of July 28th, 2020

Conclusion from the Ruling: Supply of technical protection service - remote monitoring, performed by a VAT payer, based on the concluded contract, to individuals and legal persons by using its own software, is considered performed on the day when the legal basis for providing the service (contract) ceased. Therefore, when the contract for the provision of technical protection services is concluded for a period of one year and the fee is agreed for the entire period of the service provision, such a service is considered provided on December 31st of that year.

In the case of a partial and economically divisible service, which exists if a fee has been specifically agreed for certain parts thereof, such service is considered to be performed at the time when the provision of the part thereof is completed. For instance, if the monthly fee is agreed, regardless of whether the contract, in addition to the monthly fee, stipulates the fee for the entire period of service (for the whole year), such partial services are considered to be provided at the end of each month (e.g., January 31st, etc.) of that year.

The above-mentioned Ruling is particularly significant for VAT payers who perform supply of services based on long term contracts, and on which occasion a fee is specifically agreed for certain parts of economically divisible services.

Determination of goods that are considered to be secondary raw materials

Ruling of the Ministry of Finance, no. 011-00-00489/2020-04 as of July 23rd, 2020

Conclusion from the Ruling: When during the production process of goods, made of metals or their alloys, due to certain damages, unusable goods are produced as a result, the goods in question are considered to be secondary raw materials. However, when during the production process of goods, made of metals or their alloys, goods of wrong dimensions or of inadequate quality are produced as a result, those goods are not considered to be secondary raw materials.

The above-mentioned Ruling is particularly significant for VAT payers whose activity involves performing production processes, where several types of waste semi-finished products, or products of inadequate quality incur.

VAT treatment of the supply of goods and services in the field of construction in the case of construction of a wastewater treatment plant from the landfill complex

Ruling of the Ministry of Finance, no. 011-00-441/2020-04 as of August 18th, 2020

Conclusion from the Ruling: The construction of a wastewater treatment plant from the landfill complex, performed by the contractor to the investor, is considered to be the supply in the field of construction, as an activity from the group 42.99 - Construction of other unmentioned buildings in line with the Classification of Activities. In addition, the determination of the tax treatment of the supply in question is not influenced by the fact that it is a temporary facility, i.e. the plant that will be removed within five to six years from the date of completion of construction.

The above-mentioned Ruling is particularly significant for VAT payers who provide and who are provided with the construction services involving installation of wastewater treatment plants from the landfill complex, and which also points out that it is not important whether the facility is permanent or temporary.

For any questions regarding the application of the rulings in the field of Value Added Tax, you can contact Pavle Kutlesic, LL.M., Senior Manager in Tax Department, via email address: pkutlesic@deloittece.com.

Corporate Income Tax

Using the transactional net margin method and benchmark analysis when determining the transaction price based on the “arm’s length principle”

Ruling of the Ministry of Finance, no. 011-00-410/2019-04 as of July 8th, 2020

Conclusion from the Ruling: The taxpayer may use a benchmark analysis of the market range of margins, if the data used to prepare that analysis is determined in the manner and under the conditions prescribed by the Rulebook on Transfer Pricing. Therefore, this analysis is acceptable if the final year of the analyzed period (2014, 2015 and 2016) is at the same time the last year for which the necessary financial data are available in the databases of publicly available data used by the taxpayer at the time of the analysis.

The above-mentioned Ruling is particularly significant for taxpayers who apply the transactional net margin method in their transfer pricing reports.

Displaying the data in the SU form in case when the taxpayer acquires construction land free of charge from the local self-government unit

Ruling of the Ministry of Finance, no. 011-00-489/2019-04 as of July 10th, 2020

Conclusion from the Ruling: When the local self-government unit transfers the right of ownership on construction land free of charge to the taxpayer, it is not considered to be an investment in fixed assets, regardless of the fact that the contract defines the conditions that the taxpayer must meet to retain ownership on the land in question. Therefore, the value of the land shall not be stated by the taxpayer under the order number 1 and 3 of the SU form. However, having in mind that this is the land owned by the taxpayer, which, as such, is recorded in its business books, the value of the land in question shall be stated by the taxpayer under the number 4 of the SU form.

The above-mentioned Ruling is particularly significant for taxpayers who meet the conditions for tax exemption on the basis of incentives for investment in fixed assets.

(Non) existence of an obligation to pay capital gains tax on income earned by an individual through the sale of shares that are owned for ten years

Ruling of the Ministry of Finance, no. 011-00-196/2020-04 as of July 6 th, 2020

Conclusion from the Ruling: When an individual performs a transfer of shares with compensation, whilst before the transfer had them in its ownership continuously for at least ten years, in which period the share capital was increased from the company's net assets by converting retained earnings into share capital, but there was no change in the percentage of capital participation, the income earned based on the difference between the sale and purchase price of shares is not subject to capital gains tax.

The above-mentioned Ruling is particularly significant for natural persons that perform transfer of shares compensation, because it specifies that the application of the tax exemption is not affected by increases in share capital from the company's net assets.

(Non)existence of an obligation to determine and display the capital gain in the tax balance that the taxpayer realizes by assigning land based on real estate exchange contract

Ruling of the Ministry of Finance, no. 011-00-179/2020-04(2) as of July 29th, 2020

Conclusion from the Ruling: If the taxpayer is obliged, based on the assignation of land, and based on the real estate exchange contract concluded during 2019, to deregister the land in question from its business records and, in this regard, to display income (or expenditure) in the financial statements (for 2019) on the appropriate accounts, in that case he is also obliged to determine (and display) the capital gain or capital loss, in the tax balance for 2019.

The above-mentioned Ruling is particularly significant for CIT payers who dispose of assets that may be subject to capital gains tax, as it specifies that this liability depends primarily on the accounting treatment of the transaction.

Exemption of qualified income from the tax base

Ruling of the Ministry of Finance, no. 011-00-495/2020-04 as of September 9th, 2020

Conclusion from the Ruling: An income that the taxpayer (owner of a computer program deposited in the register of the competent authority) realizes on the basis of allowing the program in question to be used by another individual (user), is considered to be an income that can be exempted from the tax base, under certain conditions. However, when during the term of the contract on the use of a computer program, the taxpayer realizes income from individuals with whom he has concluded contract on product advertising, by advertising the products of these individuals within such computer program, it is not considered to be an income that can be exempted from the tax base.

The above-mentioned Ruling is particularly significant for taxpayers whose business model depends on income generated by advertising performed via third-party ads within free applications.

For any questions regarding the application of the rulings in the field of Value Added Tax, you can contact Pavle Kutlesic, LL.M., Senior Manager in Tax Department, via email address: pkutlesic@deloittece.com.

Accounting law

Recording of the sales revenue reduction based on the fee for the secondary product positioning

Ruling of the Ministry of Finance, no. 011-00-455/2020-16 as of July 27 th, 2020

Conclusion from the Ruling: IAS18 provides that the invoice for product positioning services, in the customers’ retail outlets, for the seller represents the basis for a discount in relation to the previously delivered invoice. In this regard, instead of recording the advertising expenditure, the seller may state the fee for secondary positioning as a reduction of revenue from the sale of goods.

The above-mentioned Ruling is significant to most legal entities operating in retail sector, because it emphasizes the possibility that the fee for the secondary product positioning, even if it contains elements of advertising, is determined as a reduction in revenue from the sale of goods. 

Recording of entertainment expenses based on expenses related to increasing sales for certain (already known) customers

Ruling of the Ministry of Finance, (Department for financial systems) no. 430-00-196/2020-04 as of August 25th, 2020

Conclusion from the Ruling: When determining whether a particular cost should be considered as an advertisement and propaganda or entertainment expense, the following rule shall be followed: services made for advertisement and propaganda are intended for a large number of people (unknown) under the same conditions, as opposed to services that are made for entertainment and intended for only certain (known) persons.

Given that expenses in the form of products and catering services, aimed at increasing sales, are intended only for persons known in advance (in this case, only bus drivers and tourist guides are listed), these expenditures should be recorded as entertainment expenses. Also, each legal entity should, by its general act, regulate in more detail the procedure of approval and the amount of entertainment expenses.

The above-mentioned Ruling is significant to most taxpayers because it represents one of the newer insights into the position of the Ministry of Finance on the treatment of entertainment expenses.

For any questions regarding the application of the rulings in the field of financial reporting, you can contact Dusanka Bastaja, Manager in Tax Department (Bookkeeping and Accounting services), via email address: dbastaja@deloittece.com.

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