Opening an office in a foreign country is never an easy decision.
The first question that comes in mind is what form of entity you would need to register in order to perform certain business activities in a foreign country. After that, you have to take into consideration the taxes you have to pay for the transactions you intend to perform and for the income you intend to achieve.
One of the most frequently asked questions from our clients is: Is there any possibility to save money?
Yes, there is, especially if you timely make the right tax planning.
In the following text, we present to you taxation of certain transactions in Serbia. We’d like support you in making an easier and wiser choice if you are considering incorporation between Limited Liability Company (“LLC”) and branch office in Serbia.
Corporate Profit Tax
Please find below certain specifics pertaining to the branch office. These information make it easier for you to distinguish between the determination of taxable profit and the recognition of expenditures in the tax balance sheet in relation to LLC.
- Interest costs related to a loan received from head office (a Mother Company) of the branch shall not be recognized as costs in Tax Balance Sheet of the branch office.
- Fees based on copyright and related rights and industrial property rights that the branch pays to its non-resident Mother Company shall not be recognized as costs in Tax Balance Sheet of the branch.
Please note that there are more specifics related to the recognition of costs in the Tax balance sheet of a branch office that depend on the specific case, such as costs incurred during providing support to business activities of the Mother Company and costs incurred from leasing equipment from Mother Company, etc.
Withholding Tax/ Tax Determined by the Decision of Tax Authorities
Serbian Corporate Income Tax Law envisages that the following payments to non-resident legal entities are subject to 20% Serbian WHT unless applicable DTT*** stipulates differently:
- Rental fees for rent of movable assets and real estate properties
- Fees from market research services, accounting and auditing services and other services in the field of legal and business consultancy, regardless of where they are provided or used, or where they will be provided or used
***In order to apply beneficial WHT rate envisaged by the applicable DTT, the following two conditions must be meet:
- Income recipient must provide tax residency certificate of contracting state
- Income recipient must be beneficial owner over the income received
Here’s an example of applicable tax rates, stipulated by the DTT between Serbia and Bulgaria:
- Dividends: tax rate at 5% on gross income, in case the company owns at least 25% of shares in Serbian company; tax rate at 15% on gross income in other cases
- Royalties, including fees for rent of equipment: tax rate at 10% on gross income
- Interest: tax rate 10%
- Services: 0%
Aforementioned taxation shall not be applied to the branch offices. For branch office the following taxation applies:
- Interest, royalties and fees for above-stated services achieved by a non-resident entity from its branch office in Serbia are not subject to withholding tax (or tax determined by the decision of tax authorities)
- Transfer of net income of the branch office to its mother company abroad, upon payment of corporate income tax in the Republic of Serbia, is not subject to withholding tax, because it will not be considered as a dividend payment to a non-resident entity by a resident legal entity
- In case when non-resident entity achieves income from its branch office in Serbia, based on a lease of movable or immovable property in Serbia, a tax determined in the Decision of tax authorities shall be paid on such income
Examples of the Provisions Related to Tax Optimization for Branch Office Vs. Llc by Applying Respective Double Tax Treaty
Legal entity resident of Bulgaria is considering either to establish a branch office or LLC in Serbia. Planned profit in Serbia is RSD 10.000.000. According to the applicable DTT withholding tax for dividend payment is 5% (for ownership over 25% or more shares). Further transactions between Bulgarian LLC and its branch office or LLC in Serbia are not planned.
Legal entity resident of Bulgaria is considering either to establish a branch office or LLC in Serbia. Planned profit in Serbia is RSD 10.000.000. Further, Bulgarian LLC shall provide software for production and for that will receive remuneration in the amount of RSD 3.000.000 per year.
Royalties paid by the branch office to its non-resident mother company shall not be recognized as costs in the tax balance sheet of the branch office (corporate tax at a rate of 15% shall be paid). However, this kind of payment is not subject to withholding tax in a case when the branch office pays royalties,
DTT provides beneficial withholding tax rate at 10% for royalties.
We hope that we clarified some of the questions you might had about starting business activities and tax planning in Serbia. At this moment Serbia has signed Double Tax Treaties with 59 countries, so this might be just a right time to consider spreading your business to this area.
Do you have any questions regarding opening an LLC or a branch office in Serbia? Feel free to contact us through our Contact form.