What Tax Reliefs Are There for Serbian Startups?

Serbia, a country at the crossroads, located in Southeastern Europe, is home to many IT talents. It is also a place where large-scale companies outsource their IT departments. Global companies seeking reliable IT staff select Serbia as the next IT talent hotspot in Europe.

Many global IT companies like Microsoft see potential in local developers, multiplying their top talents: software engineers, security engineers, backend developers, blockchain engineers. The US companies comprise a substantial portion of foreign companies closely followed by European countries. For the past two years, Germany and the UK have been showing interest in the Serbian IT sector.

The IT sector in Serbia, together with growing workforce demand, makes it a perfect place for outsourcing services. Software solutions, testing, apps are just a part of what software outsourcing companies have to offer.

The government is keen to offer incentives in the form of tax relief to smooth the path to startup success for both entrepreneurs and investors.

Most measures relate to tax incentives for companies that have the intellectual property registered in Serbia, as well as companies that are engaged in research and development in Serbia, and tax relief for companies investing in Serbian startups.

Moreover, the benefits for IT companies and startups will have a direct impact on how these measures will be applied in practice and how much the procedure for using these facilities will be simplified for small companies operating in Serbia.

Tax relief schemes for startups include:

1. IP Box regime

Only 3% corporate income tax (CIT) for revenues from intellectual property crated in Serbia.

The CIT Law introduces tax incentives 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 THE condition that the IP must be registered in Serbia. The incentive applies to the IP registered as of January 1, 2019.

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 opt for it. The CIT Law provides rules for determining the qualified income.

The taxpayer is obliged to specifically display respective income on the tax balance, as well as to prepare, and at the request of the Tax Administration, submit documentation in the manner and form prescribed by the Ministry of Finance.

2. R&D Deduction

Research and development (R&D) double deduction

The CIT Law provides a new tax incentive – – expenses directly related to R&D activities performed in the Republic of Serbia are tax-deductible in the double amount.

Research is defined as the originally planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Development is defined as 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.

The stated is not applicable to research expenses arising the exploration of oil, gas, or mineral resources in the extractive industry.

3. Tax Credit for Investments in Start-up Companies

The Corporate Income Tax Law introduces tax incentives for taxpayers, which are not deemed to be performing an innovative business activity, based on their investments in start-up companies, i.e. newly established companies performing innovative business activities, applicable to investments made as of January 1, 2019.

A 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.

The tax credit may be used by the taxpayer:

• who, before making the 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 they invest,
• 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 was not decreasing their 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.

The 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 (approx. EUR 850,000), while the maximum amount of the tax credit, regardless of the number of investments, which could be used in one tax period by the taxpayer, amounts to 50,000,000 dinars (approx. EUR 425,000). An exception to the general rules applies in the case of related entities having the right to use this tax credit.

Unused parts of the tax credit may be carried forward, but not longer than five years.

For a company to be deemed as a newly established company performing innovative business activities, such company needs to fulfill 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 has not distributed dividends since the establishment, nor will it distribute dividends for 3 years 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 the fulfillment of conditions for a tax credit, R&D expenses represent at least 15% of total expenses or that more than 80% of employees are highly qualified or that the company is the owner or user of registered IP or patent directly related to innovation activities.

4. Exemption From Income Tax for Founders

An employer – a company, entrepreneur, or an agricultural entrepreneur,registered with the Business Registers Agency by December 31, 2020 (hereinafter: a newly established employer as defined by the Law), is entitled to exemption from income tax and contribution payment for the founder, who works at the company, i.e. exemption to the personal income of the entrepreneur or agricultural entrepreneur.

This possibility can be used for salaries paid by the employer within the period of 12 months from the day of the company formation, i.e. registration of the entrepreneur or agricultural entrepreneur. The basic condition is related to the amount of the salary – it cannot exceed 37,000 dinars on a monthly basis, i.e. without the corresponding salary obligations.

The exemption is regulated by two different acts of law, depending on what it refers to.

4.1. Taxes

Tax exemption to the founder’s income is prescribed by the Personal Income Tax Law, and in addition to the previously mentioned condition regarding the monthly salary amount, a few more are provided:

• the founder must work at the company and has to be registered for mandatory social security insurance,
• the entrepreneur, i.e. agricultural entrepreneur must be registered for mandatory social security insurance,
• during the period of tax relief exercise, that right can be exercised by a maximum of nine founders who are employees who meet the conditions,
• that the founder, i.e. entrepreneur or agricultural entrepreneur was registered at the National Employment Service as unemployed within at least 6 months prior to the day of registration as a newly established employer, i.e. that they have completed secondary, tertiary or higher education in accordance with the Law within 12 months prior to the day of registration as a newly established employer.

If you have any questions about the matter above, please feel free to contact the WTS team.