Double taxation refers to situation in which the same financial assets or earnings are subject to taxation at two different levels in the same tax jurisdiction or in two different countries.
That means that there are two types of double taxation: economical and juridical (international).
Economical double taxation is related to situations where people or companies pay two or more taxes from one tax basis (e.g. when a company pays taxes over the profit the made, and after that they are paying out dividend to their stockholders which is also taxed, but with a dividend tax).
On the other hand, international double taxation occurs when same tax subject is taxed in different countries for the same object and for the same period of time.
International businesses are often faced with issues of double taxation and it can have very negative impact on investments.
There are two ways in which countries deal with the negative effects of double taxation.
- Unilateral, by making laws that provide collision norms that can eliminate or reduce negative effects of double taxation e.g. Serbian Property tax law states that taxes on real estate are paid only in the country in which is located.
- By signing multiple bilateral and international treaties for the avoidance of double taxation in which they agree to limit their taxation of international business.
Serbia alone has signed double taxation avoidance agreements ( DTAA) with following 59 countries: Albania, Armenia, Austria, Azerbaijan, Belarus, Belgium, Bosnia & Herzegovina, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, India, Indonesia, Iran, Ireland, Italy, Kazakhstan, Kuwait, Latvia, Libya, Lithuania, Luxembourg, Malta, Moldova, Montenegro, the Netherlands, North Korea, Norway, North Macedonia, Pakistan, Poland, Qatar, Romania, Russia, San Marino, Slovakia, Slovenia, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Tunisia, Turkey, Ukraine, United Arab Emirates, United Kingdom, Vietnam.
Models for this and similar treaties are often provided by the Organization for Economic Cooperation and Development (OECD).
Also, Serbia has entered Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
The network of DTAAs between Serbia and other countries has been changeing throuout the years – new treaties with San Marino and Indonesia are now in force, while treaty with Malesia is no longer in effect.
Also, as a result of Multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting (MLI) from 1 January 2019, treaties with the following countries are amended: Austria, France, Lithuania, Poland, Slovakia, Slovenia and United Kingdom.
Methods of double taxation avoidance
Avoidance of international double taxation can come into effect in two ways:
- Exemption method, that can be full exemption (the income derived may be fully exempted while determining the rate of tax to be imposed in the country) or exemption with progression (this form is applied where tax in the country of residence is computed using graduated rates, so the tax imposed by the country of residence on the income is considered for determining the effective tax rate to be applied in that country)
- Credit method, that can be in the form ordinary credit (tax credit is given for the foreign tax suffered by the tax payer against his domestic tax imposed on the same income so that the amount of tax credit relief is normally restricted to the lower of the paid/payable in the foreign and home country) or full credit (the tax paid in the country of source is allowed as a credit in full so if the tax in the country of source is higher than the tax in the country of residence, country of residence is giving up its tax on other income).
The legislator in Serbia choose ordinary credit method as an institutional unilateral measure for corporate income tax and income tax paid by citizens abroad.
Also, signed bilateral treaties provide solutions for double taxation, by defining tax rates on income and property for residents of one of the countries that are also under tax jurisdiction of the other.
For example, acording to DTAA Serbia signed with Ruussian Federation, dividends paid by a company resident of a contracting country to a resident of the other contracting country shall be taxable in that other country. Dividends may also be taxed in the contracting country of which the company paying the dividends is a resident, in accordance with the laws of that country, but if the recipient is the ultimate beneficiary of those dividends, the reduced tax may not exceed:
1) 5% if the ultimate beneficiary company (excluding partnership) directly owns at least 25% of the capital of the company paying dividends and invested in it at least 100,000 USD or the equivalent amount in the national currency of the contracting country;
2) 15% in all other cases.
Most of the DTAAs also apply two different rates for dividend tax, with lower tax rates for situations when recipient company holds at least 25% of the paying company.
Similar solutions are found for taxation of interests, royalties, services and capital gains.
Complete list of countries Serbia has DTAA signed with, along with the tax rates applied using those treaties can be found on the link: