The two main sets of tax subsidies to be considered are: (i) the salary tax and contributions exemptions ("salary tax incentives") to which employers who perform research and development activities within the scope of their activities in Serbia are entitled to, and (ii) corporate income tax exemptions ("corporate tax incentives").
Salary tax incentives
Pursuant to the Personal Income Tax Act and the Act on Contributions for Mandatory Social Insurance, the employer – a legal entity who carries out R&D activities within the scope of its activities in Serbia, is exempted from paying:
- 70 % of the calculated and withheld salary tax (the salary tax rate is 10 %); and
- 100 % of the contributions for mandatory pension and disability insurance (for the full amount of pension and disability contributions [the full rate of social contributions in Serbia including pension/disability, health and unemployment insurance is 35.4 %];
on salaries of employees who are directly engaged in R&D, proportionally to the time those employees spend on R&D activities in relation to full-time employment.
The employer separately calculates taxes and contributions for the portion of the salary being proportionate to the time that the employee has spent working on R&D (if they have not dedicated their full-time working hours to R&D) and for the salary due for hours the employee spent working on other jobs (excluding R&D).
In terms of salary tax incentives, research is original and planned research undertaken with the aim of acquiring new scientific or technical knowledge and understanding, while development is the application of research results or the application of another scientific achievement or design with the aim of producing new or significantly improved materials, devices, products, processes, systems or services before entering into commercial production or use.
Software development is considered to be an R&D activity pursuant to applicable tax regulations.
Eligibility criteria for the application of salary tax incentives
The following must be fulfilled to exercise the right to salary tax incentives:
- it applies to employees that are directly engaged in R&D work, i.e. directly involved in identifying and solving appropriate process or technical issues or tasks associated with a specific R&D project (e.g. software developers);
- at least 90 % of all employees working on R&D perform own activities in the implementation of the R&D project in Serbia;
- only Serbian legal entities can be eligible (not applicable to a foreign company or its branch or representative office in Serbia);
- the employer must implement the R&D project for its own account (it must not perform R&D as a service for others / including working for a shareholder or an affiliate based on an intragroup service agreement);
- the employer must retain ownership over the developed software under the R&D project (i.e. intellectual property rights) created by such R&D.
These incentives cannot be applied to employees that are already subject to another type of incentive.
In Serbia there are many start-ups that have already developed their own tech products and are continuing to work on improving their functions. Pursuant to an Official Opinion of the Ministry of Finance, the R&D activities that are subject to salary tax incentives (and the incentives concerning corporate income taxes explained below) can also include work on upgrading the existing software solutions, including employees working on the design, testing and development of new functions of already existing software.
Corporate tax incentives / IP Box
These incentives can be used in parallel with the salary tax incentives.
The corporate tax incentive implies that expenses directly related to R&D may be recognised as expenses in the employer's tax balance, in a doubled amount.
Expenses directly related to R&D that can be doubled include, inter alia, (i) salary costs of R&D employees, (ii) costs of materials that are directly related to R&D, (iii) costs of acquiring protected copyright, patents, etc. (i.e. intangible assets), as well as costs related to the right to use intangible assets (e.g. licences, etc.) directly related to R&D, and (iv) the costs of renting real estate that is directly used for R&D, etc.
Corporate tax incentive for copyright and patent-related income (IP Box)
Income being realised by the holder of IP rights (copyrights and other related rights) through licensing rights, being subject to corporate income tax, can be exempted from the tax base in the amount of 80 % of the income thus achieved. The income generated by transferring the ownership over the copyright or related rights are excluded from this incentive.
This incentive also applies to income generated from licensing rights over inventions by the holder of rights over patents or the patent applicant.
To use this incentive, the company must previously deposit the copyright or submit an application related to the invention to the Serbian Intellectual Property Office.
Given the set of tax incentives presented above, it is obvious that Serbia is dedicated to becoming the leading playing field for the start-up ecosystems in this part of Europe.
Whether Serbia's political course can influence reluctant investors, especially from the US, is yet to be seen. Nevertheless, the local start-up scene will undeniably benefit from the introduced tax measures.