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To attract investors in the area of innovation technologies, Serbia has adopted a set of subsidies relating to employees' salaries and corporate income taxes. In recent years, the country has set its sights on being one of the largest European hubs for EU and overseas IT companies using talented IT workforce only as an outsourcing service supplier while retaining actual project development in the countries of capital origin. This is seen as an opportunity to motivate foreign IT companies doing business in Serbia not only to shift their operations to Serbia on a larger scale, but to tie IP rights on their tech products to their affiliated Serbian companies.
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").
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:
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.
The following must be fulfilled to exercise the right to salary tax incentives:
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.
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.
authors: Vlajkovic Marija, Andrija Sarić