On Monday, 28 September, the Serbian Parliament adopted amendments to the VAT Law. The amendments introduce significant changes into the Serbian VAT system. The most important changes include the mandatory VAT registration of foreign entities, new rules governing VAT treatment of electricity supply, gas supply, and supplies for which the deduction of input tax is not allowed. Other important changes include expansion of existing schemes and introduction of new special VAT schemes for certain types of supplies. In addition, the amendments clarify many of the existing VAT rules in order to facilitate their easier application in practice.
Most of the changes introduced by the latest amendments will apply as of 15 October 2015. In addition, the Serbian Ministry of Finance will issue new VAT bylaws for the implementation of the new VAT rules.
VAT Registration of Foreign Entities
Up until recently, foreign entities which made taxable supplies in Serbia were neither required, nor allowed to register for VAT in the country. Foreign entities could only appoint their VAT representative in Serbia, provided that the appointment of a VAT representative was optional. In case a foreign supplier did not appoint a VAT representative, the VAT due on such foreign entity's supplies was settled by the local recipient of goods and services, through a reverse charge. On the other hand, the position of the VAT representative appointed by the foreign supplier was somewhat peculiar. In essence the VAT representative treated the foreign supplier's VAT as his own VAT and was required to pay such VAT through his own VAT return. As a consequence, the VAT representative was not allowed to deduct input VAT which the foreign entity paid to his Serbian suppliers. As a result, in practice, foreign suppliers almost never appointed a Serbian VAT representative, and the VAT due on supplies made by foreign entities was settled through a reverse charge by Serbian recipients of goods and services.
The latest amendments to the Serbian VAT Law introduce mandatory VAT registration of foreign entities who make VAT-able supplies in Serbia. In this respect, the amendments explicitly prescribe that foreign entities shall be treated as taxable persons.
For the purpose of VAT registration, a foreign entity is required to appoint a VAT representative in Serbia. The VAT representative may be a natural person – Serbian national, or a Serbian company, provided that such company was registered for VAT in the previous 12 months. Entities which have unpaid tax liabilities and which have been convicted of a criminal offence cannot act as VAT representatives. Permanent establishment of a foreign entity (i.e. a branch) cannot act as VAT representative.
Responsibilities of a VAT representative include the obligation to register his foreign principal for VAT, to issue invoices, file VAT returns and pay VAT on behalf of the foreign taxpayer. Foreign VAT taxpayers (i.e. their VAT representatives) are allowed to deduct input VAT under the same general conditions as local taxpayers.
A VAT representative is jointly and severally liable for VAT liabilities of the foreign taxpayer.
The amendments retained the solution whereby, in case a foreign supplier does not register for VAT, the local recipient is required to account for output VAT due (provided that the local recipient also has the right to deduct such VAT subject to general conditions). This solution is likely to raise many questions in practice, such as whether VAT registration of foreign suppliers is really mandatory or only optional, the manner in which local recipients of goods and services supplied by foreign suppliers will inquire about their Serbian VAT status, among other questions.
The VAT registration of foreign entities for VAT in Serbia is a novelty in the Serbian VAT system. The latest amendments do not provide an entirely clear picture as to what would be the actual VAT status of foreign suppliers in Serbia, the responsibilities of their Serbian customers, and how various administrative and substantive VAT obligations of foreign taxpayers will be handled in practice. All of these matters should be regulated by a rulebook which should be issued by the Serbian Ministry of Finance soon, as the new rules governing VAT registration of foreign companies apply as of 1 October.
The VAT Treatment of Supplies of Electricity and Gas
The latest amendments have aligned Serbian rules governing the VAT treatment of the supply of electricity and gas with the EU VAT Directive.
VAT due on supplies of electricity and gas intended for further sale will be settled through a reverse charge: the buyer of gas/electricity will be required to account for output VAT due on the supply (instead of the seller) and will have the right to deduct such VAT as his input VAT.
Place of supply rules for supply of electricity and gas are also changed: the place of supply is now the place of the registered seat of the trader (supplier). For supplies of electricity and gas intended for final consumption, the place of supply is the place where the electricity and gas have been received by the customer.
The place of supply for services of the provision of access to, and of transport or transmission through, natural gas and electricity distribution systems and the provision of other services directly linked thereto is deemed to be the place where the seat of the recipient of service is located. The same place of supply rule applies to the supply of service of access to organized electricity/gas markets.
The new rules governing the VAT treatment of electricity and gas should significantly relax the cash flow of electricity and gas traders, because the electricity and gas traders will effectively not be required to pay VAT on the wholesale of electricity and gas. Generally, only final consumers will actually pay VAT.
Special VAT Scheme for the Construction Industry
So far, only entities acting as investors (as defined by the Serbian construction regulations) in construction projects were required to apply reverse charge on supplies made to them by their immediate suppliers. In another words, the special VAT scheme for the construction industry applied only to supplies of construction services between the investor and the main contractor.
The latest amendments to the VAT Law expand the application of the special VAT scheme to all participants in construction projects, including investors, main contractors and subcontractors. This new solution should effectively eliminate payment of VAT on supplies of goods and services made between participants in construction projects.
Notwithstanding the indented purpose of the new VAT rules for the construction industry, the language of the relevant amendments is such as to leave room for numerous questions, primarily with respect to the scope of application of the special VAT scheme. These questions will hopefully be clarified in the new VAT rulebook to be issued shortly by the Ministry of Finance.
Deduction of Input VAT
The latest amendments to the VAT Law change the list of supplies which qualify for the deduction of input VAT. The amendments now allow a deduction of VAT paid on goods and services which are used in administrative premises (such as household appliances, TV and musical devices, carpets, and similar). The deduction of VAT paid on these goods was prohibited since VAT was introduced in Serbia.
On the other hand, the latest amendments prohibit, for the first time, the deduction of input VAT paid by the Serbian companies on goods and services used for the provision of meal and transportation services to their employees. Given that they no longer have the right to deduct such VAT, it is now clear that Serbian employers are not required to pay VAT on provision of food and transportation services to their employees neither.
VAT on the Sale of Pledged Assets
The amendments introduce the new system of payment of VAT on the sale of mortgaged and pledged assets. From now on, the sale of mortgaged and pledged assets will be subject to the reverse charge, so that the buyer (and not the owner) of pledged/mortgaged assets will be required to account for the output VAT due on such sale, provided that the buyer will also have the right to deduct this VAT. The same rule will apply to the sale of assets in the forced collection of debts.
The reason behind this new rule is that, in the practice, the owners of pledged assets usually did not issue a VAT invoice for the sale of assets in public auctions. This prevented deduction of input VAT on the side of the buyer. To simplify the matter, the amendments to the VAT Law introduce a new system of settlement of VAT for the sale of goods in public auctions.
Prior to the VAT Law amendments, the sale of used vehicles was subject to a special VAT scheme: VAT was paid on the difference between the acquisition and the sale price of the vehicle. The latest amendments to the VAT Law prescribe that VAT on the sale of used vehicles will be due only if the VAT calculated under the special scheme is higher than the property transfer tax due on such sale (2.5%).
On the other hand, under Serbian Property Tax Law, the property transfer tax has to be paid only if the sale of a car is not subject to VAT. Therefore, the effect of the new rule is that a car dealer should calculate the amount of both VAT and property transfer tax, and pay the one which is higher.
This is a very unusual solution. Even though it may have been intended to relax the tax position of car dealers, the new solution may very well complicate their business in practice.
Transfer of Business as a Going Concern
Prior to the VAT Law amendments, the sale of a business as a going concern was outside the scope of VAT subject to the condition, among others, that the buyer of the business continues to conduct the same business activity as the seller. The amendments now prescribe that the buyer must conduct the same business activity for a minimum 3 years. If the buyer discontinues his business activity before the expiration of the 3-year threshold, than the buyer of the assets will be required to pay VAT which would have been paid on the sale of assets under the general rules.
Even though the wording of the relevant provision of the VAT Amendments is not entirely clear on this point, it appears that the obligation to pay VAT on the sale of a business as a going concern does not apply to capital goods (equipment and immoveable property), if the buyer is required to make an adjustment of input VAT paid on capital goods.
Chargeability of VAT for IP services
The amendments prescribe that VAT on the supply of IP Services has to be paid at the time of issuance of invoice. Until now, IT services were subject to the general rule on the chargeability of VAT: chargeable event occurs when the supply was made or when the payment was made, whichever occurs first.
The new rule for IP services is intended to resolve the dilemma stemming from the fact that in practice, payments for software licenses were usually made in advance at the beginning of the license period for the whole period. It was not clear whether such payment should be treated as an advance payment (so that both the invoice for advance payment and the final invoice should be issued at the end of the license). The dilemma was essentially artificial, but did cause significant confusion in practice. The amendments now make clear that in these cases, the supplier of a license should issue only one invoice and pay the VAT due when such invoice is issued.
VAT Return Filing and VAT Period
The amendments introduce a unified deadline for the filing of VAT returns for all taxpayers, regardless whether they file their VAT returns monthly or quarterly. Starting from 1 January 2016, all VAT taxpayers will submit their VAT returns by the 15th of the month following the expiry of their VAT period (calendar month or calendar quarter).
The amendments also specify that a taxpayer whose total turnover in the previous 12 months was lower than RSD 50,000,000 (app. EUR 415,000), must file its VAT return quarterly.
In addition, starting from 1 January 2017, VAT taxpayers will be required to file a special report on calculated VAT ("pregled obračuna PDV-a") together with their regular VAT return. Taxpayers who fail to file this report will be deemed not to have filed a VAT return.
The amendments do not provide any explanation as to the form, content or purpose of this new VAT report. It is expected that the Ministry of Finance will issue a rulebook which will provide more guidance in this respect.