Serbia: Significant Changes to Personal Income Tax Regime

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  • Overhaul of the lump-sum taxation system.

In earlier practice, several problems in the lump-sum taxation system have been noted. These include the uncertainty of being granted a lump-sum taxpayer status and the unknown total amount of the tax obligation at the moment when the individual starts his or her business, and a delay in the issuance of tax decisions.

The adopted amendments to the Law create a precondition for simplifying the tax calculation procedure for lump-sum income generated by sole traders, by automatizing the process for determining the amount of the tax obligation. This is aimed at creating greater predictability for taxpayers, as well as at a reduction of costs for the tax authority.

  • Changes regarding taxing of sole traders’ or lump-sum sole traders’ income – the so-called “independence test.

The changes to the Law also provide the criteria for checking the independence of a sole trader in relation to its principal, who in most cases, as its only client is de facto its employer.

The prescribed criteria represent the so-called “independence test”, aimed at determining whether certain income of a sole trader will be qualified as the sole trader’s income from an independent activity or as income of the natural person which acts as the sole trader. If the sole trader meets at least five of the nine criteria of the independence test, it will not be considered as independent and its compensation in such case would be treated as other income according to the Law.

More information about this can be found in our earlier newsletter on the topic, available here.

  • Introducing new benefits for employers.

In order to stimulate employment, the Law introduces benefits for employers – newly established companies engaged in innovation activity. The incentive consists of a tax exemption for earnings of the founders who are employed by their own newly established companies.

In addition, employers who employ a qualified new employee have the right to tax exemption for the earnings of such qualified new employee.

The adopted amendments also introduce an incentive in the form of a reduction of the tax base for new residents hired by a domestic employer. This incentive is aimed at encouraging employment of new residents in Serbia for whom there is a need on the domestic labor market due to their special expertise.

  • Specifying determination of a purchase price in order to determine capital gains.

When it comes to capital gains achieved from the transfer of securities an employee received at preferential price or free of charge from its employer or the person connected with the employer, the changes to the Law regulate more precisely the manner of calculation of the purchase price of such shares, depending on whether they were previously subjected to payroll tax.

Additionally, changes to the Law specify the manner of calculation of the purchase price of shares of non-resident companies and securities in case when a Serbian tax resident transfers such shares or securities with a compensation.  

  • Extension of the applicability of current benefits for the employment of new persons.

The employer of new employee is now entitled to a refund of a part of the tax paid for the new employee’s earnings, in the amount between 65% and 75%. The application of this incentive for employers has been extended to the new employees’ earnings paid until 31 December 2020.

  • Increase of non-taxable earnings.

The non-taxable amount of earnings is increased from RSD 15,300 to RSD 16,300 per month. This practically means that the income tax base, as well as the amount of the tax on that basis, are both reduced. This ensures a smaller fiscal burden on the person’s income from employment.

  • Key takeaway.

The adopted amendments of the Law bring significant novelties in the area of personal income taxation in Serbia. Whether their implementation will produce desired the effects envisaged by the legislator remains to be seen.