This and other topics will be discussed at a business briefing “Legal Risk Audit”, scheduled for 8 March at our office at 23, Resavska St. from 9:00 to 11:30 a.m.

Serbia

I.      Amendments to the Law on Tax Procedure and Tax Administration

Commercial banks now responsible for the control of the payment of salary tax and social security contributions — Write-off of tax debts under bankruptcy —Extension of payment of tax debts when undergoing financial restructuring — Settlement of the tax debts of “blocked companies” by way of the assignment of receivables is now allowed — Procedure for forced collection of tax perfected — Increased thresholds for the criminal offences concerning illegally declared amounts of tax refunds and tax credits  —  Additional limitations on the possibility to file an amended tax return

II.               Amendments to the Law on Corporate Income Tax

The scope of entities subject to corporate income tax has been extended — Distribution of assets to shareholders in liquidation and bankruptcy now subject to withholding tax — Tax Exemptions for governmental securities and investors in free trade zones  — Write-off of receivables in the financial restructurings fully recognized for tax purposes  — Expenses from the impairment of capital acquired though conversion of debt into equity in privatization restructuring recognized for tax purposes  —  Deductibility of expenses from the write-off of receivables

III.             Amendments to the Law on Excise Tax

The amounts and the method for the assessment of excise tax on tobacco products has changed

IV.            Amendments to the Law on Contributions for Mandatory Social Security Insurance

New rules concerning the payment of social security contributions for sole entrepreneurs and priests — Increased penalties for a breach of the obligations of sole entrepreneurs and natural persons in relation to social security contributions

V.               The Rulebook on Tax Accounting has been adopted

Regional

I.                   The Regional Network of Double Tax Treaties in 2012

— Serbia

DTT with Montenegro starts to apply — Double taxation treaty between Serbia and Indonesia ratified — Negotiations with South Korea initiated

—Montenegro

Double taxation treaty between Montenegro and Ireland ratified — Draft double taxation treaty between Montenegro and United Arab Emirates is signed — Germany confirmed the application of the double tax treaty with Montenegro

—Bosnia and Herzegovina

Double taxation treaty between Bosnia and Herzegovina and Austria starts to apply — Double Taxation Treaty between Bosnia and Herzegovina and Qatar now applies — Treaty on social insurance between the Grand Duchy of Luxembourg and Bosnia and Herzegovina ratified

—Macedonia

Double Taxation Treaty between the Republic of Macedonia and the Kingdom of Norway ratified

Serbia

On 26 December 2011, the Serbian Parliament enacted a set of laws which introduced numerous changes in the Serbian tax system, including changes to the Law on Tax Procedure and Tax Administration, the Law on Corporate Income Tax, the Law on Excise Taxes, and the Law on Mandatory Social Security Contributions. The amendments to the tax laws adopted in December 2011 have been published in the Official Gazette of the Republic of Serbia no. 101/11 dated 30 December 2011.

I.    Amendments to the Law on Tax Procedure and Tax Administration

With the amendments to the Law on Tax Procedure the Government introduced a number of changes which appear to be aimed primarily at increasing efficiency in the area of tax collection. At the same time, the amendments contain a number of provisions aimed at relaxing the taxation position of companies that are facing financial difficulties and which are subject to financial restructuring.

Commercial banks now responsible for the control of the payment of salary tax and social security contributions

Commercial banks that are used by Serbian companies to pay employee salaries are now responsible for controlling whether the payment of salaries is accompanied with the payment of tax and contributions for social security insurance. Under the relevant laws, companies are required to pay the tax and social security contributions of their employees simultaneously with the payment of salaries. Under the latest changes of the Law on Tax Procedure and Tax Administration, if the payment of tax and social security contributions is not made simultaneously, the bank will not proceed with the payment of salaries. Relevant provisions prescribe that tax and social security contributions should be paid “in accordance with the law”, which implies that the banks will also be responsible to check the accuracy of the amounts of tax and social security contributions due on the amount of salaries paid to employees.

The latest amendments further prescribe that if the Serbian company that is paying the relevant taxes does not have sufficient funds on its account for the payment of relevant public levies, the bank will allow the proportional payment of salaries together with the proportional amount of social security contributions.

Failure by the bank to comply with its obligations concerning the control of payment of social security contributions is a misdemeanour punishable by a fine equal to the amount of unpaid tax and social security contributions increased by 50%. The responsible natural person in the bank may also be punished by a fine ranging from RSD 5,000 to RSD 50,000 (app. EUR 500 to EUR 5,000).

With this, the Serbian Government has effectively assigned commercial banks with the public authority to control the payment of public levies which is normally the responsibility of the Tax Authority. Serbian banks do not have the personnel, skill and knowledge necessary to be able to control the accuracy of the payment of public levies and this purported solution is bound to cause a lot of controversy when applied in practice. In addition, this solution will ultimately place the consequences for non-payment of public levies by the employer on the employees who may very well be left without their salaries because their employer did not pay the accompanying social security contributions, or because the bank finds that social security contributions have not been fully assessed in accordance with the letter of the law. 

Provisions introducing the obligation of the banks to control payment of tax and social security contributions will start to apply on 1 July 2012. This grace period is intended to provide Serbian banks with sufficient time to prepare for their new role in the Serbian fiscal system.

Write-off of tax debts under bankruptcy

Tax debts which could not have been collected by the conclusion of the bankruptcy will be written-off automatically on the basis of the law, except for secured tax debts and for tax debts where other individuals are responsible for payment of tax, aside from the bankrupt party. The write-off of tax debts in bankruptcy does not apply to contributions for social security contributions.

Extension of payment of tax debts when undergoing financial restructuring

The Law on Tax Procedure and Tax Administration now provides a possibility for the extension of deadlines for the payment of tax debts for taxpayers which are the subject of financial restructuring, so as that the debt may be paid in 60 equal monthly instalments, with a grace period of 12 months. The payment extension may be allowed on the basis of a request from a company undergoing financial restructuring and it does not need to be accompanied with the provision of security if the total amount of tax debt does not exceed certain thresholds prescribed by the law.

Settlement of the tax debts of “blocked companies” by way of the assignment of receivables is now allowed

As an exception to the general rule that taxpayers whose accounts have been blocked cannot settle their debts by way of the assignment of debts and receivables, the Law on Tax Procedure and Tax Administration now allows for tax debts to be settled in this manner.

Procedure for forced collection of tax perfected

Amendments to the Law on Tax Procedure and Tax Administration introduced a number of changes regulating various technical issues relevant to the forced collection of tax. Relevant provisions concerni the establishment and enforcement of security instruments, and the seizure and sale of taxpayer’s assets in the case of the forced collection of tax, etc.

The latest amendments to the Law on Tax Procedure and Tax Administration also introduce the possibility for the collection of unpaid tax directly from salaries, where the employer is responsible to withhold tax due by its employee to the Tax Authority.

Increased thresholds for the criminal offences concerning  illegally declared amounts of tax refunds and tax credits

Following numerous complaints by the commercial community, the threshold for the criminal prosecution for illegally declared tax refunds or tax credits have been marginally increased, from RSD 150,000 (app. EUR 1,500) to RSD 500,000 (app. EUR 5,000). Thresholds for the qualified forms of these criminal offences have also been increased:

—     Up to RSD 3,000,000 (app. EUR 30,000): a fine and imprisonment up to 3 years

—     Up to RSD 10,000,000 (app. EUR 100,000): imprisonment up to 5 years

—     Over RSD 10,000,000: imprisonment up to 10 years

Before the latest amendments, the threshold for imprisonment of up to five years was only RSD 150,000 (app. EUR 1,500) and for imprisonment up to 10 years – RSD 7,500,000 (EUR 75,000).

Additional limitations on the possibility to file an amended tax return

The amendments to the Law on Tax Procedure have further restricted the possibility for taxpayers to correct mistakes made in their tax returns by filing an amended tax return. A taxpayer cannot file an amended tax return once the tax control process has commenced, nor can it be amended after the issuance of their tax assessment.

II. Amendments to the Law on Corporate Income Tax

The main changes introduced by the Law on Amendments to the Law on Corporate Income Tax include the following:

—The scope of entities subject to corporate income tax has been extended

Entities subject to corporate income tax now include, apart from profitable entities organized as companies under the Companies’ Act, other forms of legal entities which are organized in accordance with other applicable laws, if such entities generate income from the sale of goods and services in the market. This primarily includes institutions which provide public services (such as organizations in the area of healthcare, education, public information or similar entities). These entities will have the status of for-profit organizations and will be subject to corporate income tax if more than 80% of their total annual revenues are generated through the sale of goods and services. These entities are required to file the same tax return as all other regular companies.

Entities which are not organized in accordance with the Companies Act and which do not generate the majority of their revenues on the market (80%-threshold) have the status of non-profit organizations and are required to file special tax return for non-profit organizations (taxed only on profits generated from the sale of goods and services). Under the general rules of the Law Corporate Income Tax, non- profit organizations are exempt from corporate income tax if their revenues exceed their expenses by less than RSD 400,000.00 (app. EUR 4,000).

Provisions introducing a new group of corporate taxpayers will start to apply from 1 January 2012, so that new entities which generate the majority of their revenues on the market will only have to pay corporate income tax for the tax year 2012, not for 2011.

—Distribution of assets to shareholders in liquidation and bankruptcy now subject to withholding tax

Perhaps one of the most important changes introduced by the latest changes to the corporate income tax law is that the distribution of assets remaining after the settlement with creditors in liquidation or bankruptcy is now subject to a withholding tax. This type of distribution is subject to taxation only if made to non-resident shareholders abroad. The text of the relevant amendments is not entirely clear on this point, but it seems that assets distributed in liquidation/bankruptcy are deemed as payment of a dividend to a non-resident. Income subject to taxation appears to be the entire amount paid to the shareholder, irrespectively of whether the value of assets distributed after liquidation/bankruptcy may be lower than what the shareholder originally invested in the company. 

In the explanations provided with the draft proposal of amendments to the Law on Corporate Income Tax, it is stated that the intention behind this new provision is only to clarify that withholding tax applies also to this type of distribution, as if it was the case that this principle also applied before the amendments were adopted. However, the fact is that the distribution of assets to shareholders in liquidation was never subject to withholding tax before.

In fact, under Article 36 of the Law on Corporate Income Tax, the distribution of assets in liquidation/bankruptcy was treated as a capital gain (“liquidation surplus”), established as assets of the company remaining after the settlement with creditors (which are distributed to shareholders) and assets which the shareholders invested in the company. Even though this was not stated clearly in the law, the established practice was that the company in liquidation (not the shareholder) was liable to pay tax on capital gains made in the process of the liquidation. The effect of the latest changes will be that the assets remaining after liquidation will effectively be taxed twice, once as a capital gain and the second time as a dividend.

—Tax Exemptions for governmental securities and investors in free trade zones

The amendments have clarified that interest on securities issued by governmental bodies (Republic of Serbia, autonomous provinces, municipalities and the National Bank of Serbia) are exempt from tax.

A new tax exemption is introduced for companies that conduct their activities in free trade zones for profit generated in the free trade zone. The exemption applies only to companies that conduct production activities in free trade zones (not for services).  In order to utilize the exemption, companies that operate in a free trade zone are required to maintain separate accounts for revenues realised and expenses incurred in relation to their business activities within free trade zones.

—Write-off of receivables in the financial restructurings fully recognized for tax purposes

Expenses from the write-off of receivables in the financial restructurings conducted in accordance with the Law on Financial Restructuring of Companies are fully recognized for tax purposes. In all other cases, the write-off of receivables may be recognized for tax purposes only subject to the condition that the taxpayer has proof that he has attempted to collect the receivable in the court proceedings.

—Expenses from the impairment of capital acquired though conversion of debt into equity in privatization restructuring recognized for tax purposes

As an exception to the general principle that expenses incurred from the impairment of assets are not recognized for tax purposes, the impairment of equity acquired through the conversion of debt in the capital in the restructuring in privatization is fully deductible for tax purposes. In this case, for the purposes of the establishment of capital gains tax, the cost of the acquisition of the shares (capital) acquired in this manner shall be equal to the lowest impaired value of the shares following the conversion.

—Deductibility of expenses from the write-off of receivables

The original text of the Law on Corporate Income Tax allowed expenses from a write-off of receivables only if the receivable had been previously included in taxpayer’s revenues. In order to also allow the write-off in cases where receivables cannot be included in revenues under the relevant accounting rules, the write-off of these receivables is now also allowed, subject to the same conditions applicable to those which were included in revenues. This condition being that the receivable was written-off because it could not have been collected and that the taxpayer has evidence that he has unsuccessfully attempted to collect in a court procedure.

Changes introduced by the amendments to the Law on Corporate Income Tax will apply to tax obligations for the tax year 2012.

III.           Amendments to the Law on Excise Tax

—The amounts and the method for the assessment of excise tax on tobacco products has changed

The fixed RSD element of the excise on tobacco products for 2012 is now increased from the initial RSD 30 per pack to RSD 33 per pack. Starting from 1 January 2013 the fixed element will be RSD 37 per pack.

The variable element of the excise is also changed to 34% for 2012, and 33% of the retail price starting from 1 January 2013 (from 35% under the old law).

Finally, the method for the establishment of the minimal excise is also changed so that the concept of the “most popular price” applicable under the old law (where the most popular price was equal to the retail price of the best-selling tobacco products) is replaced by the concept of the “average weighted price”. The weighted average price is established as a ratio between the total value and the total quantities of the tobacco products sold in the market in the given period (6 months). The weighted average price is established semi-annually by the Government. Until the Government issues relevant regulations, the weighted average price for cigarettes will be RSD 71 per pack.

IV.          Amendments to the Law on Contributions for Mandatory Social Security Insurance

—New rules concerning the payment of social security contributions for sole entrepreneurs and priests

The latest amendments to the Law on Contributions for Mandatory Social Security Insurance regulate the payment of social security contributions for sole entrepreneurs during maternity leave. In addition, certain changes have been made in relation to the method for the assessment of the base for calculation of social security contributions for priests.

 —Increased penalties for a breach of the obligations of sole entrepreneurs and natural persons in relation to social security contributions

Penalties for a failure to pay social security contributions for sole entrepreneurs and natural persons are doubled and now amount to RSD 10,000 (from the previous RSD 5,000) for entrepreneurs, and RSD 5,000 (from RSD 2,500) for natural persons.

V.              The Rulebook on Tax Accounting has been Adopted

After many years, the Government has finally issued the rulebook governing the form, method and content of records which the Tax Authority is required to maintain regarding the tax liabilities of Serbian taxpayers.

The Rulebook regulates, amongst other things, the types of tax accounting records, the tax accounting plan, the principles of tax accounting, tax accounting documents, the booking of both the payments and liabilities of taxpayers, the closing of the books, the deadlines for the booking of the relevant changes, the keeping of tax books, persons responsible for tax accounting, and the status of tax books as public documents.

It is likely that this new detailed regulation of the manner in which the Tax Authority will be required to maintain tax records will introduce more security for taxpayers in relation to their tax liabilities and the manner in which they may obtain evidence of such liabilities.

Regional

I.                  The Regional Network of Double Tax Treaties in 2012

Over the course of 2010 and 2011 countries in the region, including Serbia, Montenegro, Bosnia and Herzegovina and Macedonia, have signed or ratified a number of double tax treaties which will apply in 2012. These include the following:

— Serbia

—DTT with Montenegro starts to apply

Representatives of the Republic of Serbia and Montenegro signed the double taxation treaty in Belgrade with respect to taxes on income on 20 July 2011. Based on information received from the officials in their ministries of finance, the two countries have exchanged the relevant ratification instruments and the DTT with Montenegro was scheduled to become applicable in both Serbia and Montenegro on 1 January 2012.

The DTT with Montenegro is based on the OECD’s Model Tax Convention on Income and on Capital (OECD Model Convention). Withholding tax rates applicable under the DTT are as follows:

— Dividend: 10%;

— Interest: 10%;

— Royalty: 5% or 10% depending on the type of royalty.

The Law on Ratification of the double tax treaty with Montenegro was published in the Official Gazette – Treaties no. 10/2011 dated 7 December 2011.

—Double taxation treaty between Serbia and Indonesia ratified

The Serbian Parliament ratified a double taxation treaty with respect to taxes on income with Indonesia on 25 May 2011. The application of the DTT with Indonesia began on 1 January 2012.

The double tax treaty with Indonesia is based on the OECD’s Model Convention. Withholding tax rates applicable under the DTT are as follows:

— Dividend: 15%;

— Interest: 10%;

— Royalty: 15%.

The Law on Ratification of the double tax treaty with Indonesia was published in the Official Gazette – Treaties no. 4/11 from 27 May 2011 and came into effect on 4 June 2011.

—Negotiations with South Korea initiated

Based on unofficial information obtained from the Serbian Ministry of Finance, Serbia is currently negotiating their double taxation treaty with South Korea. According to the unofficial information, the treaty should be based on the OECD Model Convention. Again unofficially, it is expected that the representatives of Serbia and South Korea will reach an agreement regarding the text of this treaty in the near future. However, the information as to when the treaty will be concluded is not yet available.

—Montenegro

—Double taxation treaty between Montenegro and Ireland ratified

The Parliament of Montenegro ratified the double taxation treaty with respect to taxes on income with the Republic of Ireland on 22 June 2011. The treaty began to apply on 1 January 2012.

The DTT with Ireland is based on the OECD Model Convention. Withholding tax under the DTT are as follows:

—Dividend: 5% or 10% depending on the shareholding of the recipient (10% threshold);

—Interest: 10%,

—Royalty: 5% or 10% depending on the type of royalty.

The Law on Ratification of the DTT with Ireland was published in the Official Gazette of the State of Montenegro – International Treaties no. 9/11 dated 7 July 2011.

—Draft double taxation treaty between Montenegro and United Arab Emirates is signed  

The representatives of Montenegro and United Arab Emirates signed off on the draft text of the double taxation treaty in May 2011. According to unofficial information obtained from the Montenegrin Ministry of Finance, the DTT with United Arab Emirates was expected to be signed by the end of 2011 but subsequently the signing was delayed due to some technical issues.

—Germany confirmed the application of the double tax treaty with Montenegro

Based on the official press release issued by the German Federal Ministry of Finance on 26 May 2011, the double tax treaty concluded between Germany and the Federal Republic of Yugoslavia and the Federal Republic of Germany in 1988 is valid and shall apply between Germany and the State of Montenegro.

Montenegro has continued to apply unilaterally all double tax treaties concluded between the secession of Montenegro from the State Union of Serbia and Montenegro. As Montenegro was not a legal successor of the Federal Republic of Yugoslavia, many countries, including Germany, have declined to apply double tax treaties concluded with the FRY in their relations with Montenegro. As a result, Montenegrin residents have been deprived of the benefits of the double tax treaties for their income received from these countries. Germany has now acknowledged that the treaty applies also in its relations with Montenegro. This means that Montenegrin residents may now enjoy the same benefits which Montenegro has unilaterally granted to German residents in accordance with the treaty with Germany.

The DTT was published as an official announcement of the German Federal Law Gazette on 29 June 2011 (BGBl. Teil II Nr. 21, S. 745).

—Bosnia and Herzegovina

—Double taxation treaty between Bosnia and Herzegovina and Austria starts to apply

The Presidency of Bosnia and Herzegovina  ratified the double taxation treaty with respect to income and property with Austria on 24 August 2011 and it started to apply on 1 January 2012. The DTT with Austria is based on the OECD Model Convention. Withholding tax rates applicable under the DTT are as follows:

— Dividend: 5% or 10% depending on the shareholding of the recipient of dividend (25% threshold);

— Interest: 5%,

— Royalty: 5%.

—Double Taxation Treaty between Bosnia and Herzegovina and Qatar now applies 

An agreement Between Bosnia and Herzegovina and the Government of Qatar on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income was also ratified on 24 August 2011 and started to apply on 1 January 2012. The DTT with Qatar is also based on the OECD Model Convention. Withholding tax rates applicable under the treaty are as follows:

— Dividend: 5% (if the recipient of income owns 20% of the assets of the company paying the dividends) or 10% (in other cases);

— Interest: 7%,

— Royalty: 7%.

—Treaty on social insurance between the Grand Duchy of Luxembourg and Bosnia and Herzegovina ratified

The Decision on Approval of Ratification of the Agreement between the Grand Duchy of Luxembourg and Bosnia and Herzegovina on Social Insurance was ratified on 24 August 2011.

The treaty provides, inter alia, an exemption from the social security contributions in BiH to nationals of Luxembourg who are sent to work in BiH by their Luxembourg based employers. Certain additional benefits are granted under the treaty in relation to the fees, stamp duties, notarial and administrative costs of the citizens of the contracting states sent to work in the other contracting state.

The treaties with Austria, Qatar and Luxembourg were published in the Official Gazette of Bosnia and Herzegovina no. 7/11, on 14 October 2011.

—Macedonia

—Double Taxation Treaty between the Republic of Macedonia and the Kingdom of Norway ratified

The Macedonian Assembly ratified the double taxation treaty with respect to taxes on income and protection from fiscal evasion with the Kingdom of Norway on 26 August 2011. The application of the DTT with the Kingdom of Norway began on 1 January 2012.

The double taxation treaty with the Kingdom of Norway is based on the OECD’s Model Convention. Withholding tax rates applicable under the DTT are as follows:

— Dividend: 10 or 15% (depending on the ownership structure),

— Interest: 5%,

— Royalty: 5%.

The Law on the Ratification of the double tax treaty with the Kingdom of Norway was published in the Official Gazette of the Republic of Macedonia no. 117/2011 from 01 September 2011 and came into effect on 09 September 2011.

Offices

There was a gradual decrease in office premises leasing throughout 2011. Office demand remained stable and was predominantly directed towards New Belgrade, which is recognized as the Central Business District, with prevailing class A premises having been developed over in the last few years. Although some of the anticipated projects were not realized in 2011, the office market is not inactive in terms of construction and will potentially regain momentum over the next two years.

Retail

Retail rents remained stable and demand continues to be directed towards the following prime locations in Belgrade: (Knez Mihailova street and the two modern shopping malls, Usce and Delta City). It is expected that by the end of third quarter of 2012, the Stadium Center Vozdovac will be finished, which will provide additional 40,000 m2 of retail premises.

Terms prescribed by the Regulation do not preclude application of other terms prescribed by law. They also do not exclude the possibility that warranty terms could be longer than the ones prescribed by the Regulation.

A warranty term of 5 years for apartments, and a warranty term of 2 years for both commercial buildings and communal facilities, are just some of the terms prescribed by this Regulation.

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This is the fifth International Gas Conference of the South East Europe Region. At the event the topic of natural gas in light of new intentions in the energy market, i.e. the growing role of natural gas in the energy market in South East Europe, the application of new technologies in synergy with renewable energy sources, in terms of reducing the role of nuclear energy in the European and global energy scene, and many strategic issues that are related to the development of the gas sector in the South East Europe Region.

The conference is being held under the auspices of the Ministry of Energy, Mining and Industry FBiH and the Ministry of Industry, Energy and Mining of the Republic of Srpska, supported by the International Gas Union (IGU).

*Source http://www.ekapija.ba/website/bih/
 

It is expected that over 150.000 requests will be filed. 150 post offices throughout the entire of Serbia will be dealing with these requests. In order to avoid crowds, the applicants will be entitled to make an appointment for the submission of a request over the telephone.

Requests for restitution or compensation can be submitted in the 2 year period commencing 1 March 2012.

The enactment of this law is considered to be a huge step forward for the labor market in the Republic of Macedonia, since the expected advantages are increased standard of living, reducing of the gray economy, stimulating consumption, increasing the work ethics, as well as other factors that would improve the business and social environment in the country.