The internationalization of business, creation of corporate structures in order to diversify risks and create an optimal tax structure, contributed to the complexity of the doing business of domestic companies and introduced an additional need for knowledge of tax regulations. Today’s legal framework of the market economy imposes rigorous sanctions in the case of operations contrary to imperative tax regulations. An unavoidable topic of international business is also business with offshore companies, based in preferential tax systems, better known as “tax havens”.
The concept “tax haven” means a jurisdiction that has a low rate of taxation, or the undertaking of usually taxable activities (e.g. payment of profits/dividends, income of natural persons, etc.) is completely exempt from taxation. A tax haven can represent a separate state, with all constitutional elements, or it can be a part of a state (territory) with independent tax jurisdiction (tax jurisdiction) in which tax regulations apply, which enable non-residents to do business with a minimal tax burden through numerous benefits and structures.
In domestic legislation, the concept of a tax haven is recognized as a jurisdiction with a preferential tax system. Recognition of preferential tax systems, in order to prevent legal tax evasion, was done by the domestic legislator, among other things, by recognizing such destinations by adopting the Rulebook on the list of Jurisdictions with a Preferential Tax System and harmonizing other tax regulations with the specifics of doing business with a company from a preferential tax system, in such a way that resident companies, when undertaking a certain taxable action, have the tax liability in the Republic of Serbia, which under normal circumstances would either not exist or would fall under the significant lower level of the tax rate.
The domestic legislator recognized as many as 51 jurisdictions as jurisdictions with a preferential tax system (tax havens), including the US Virgin Islands, the Netherlands Antilles, Andorra, Monaco and others.
Withholding tax as a mechanism to prevent tax evasion
The domestic legislator, in the Serbian Corporate Income Tax Law (“Law”), introduced in Article 40, paragraph 4, the obligation to pay withholding tax when paying certain types of consideration to companies headquartered in preferential tax systems (tax havens), as follows:
On the income generated by a non-resident legal entity from a jurisdiction with a preferential tax system based on royalties, interest, fees based on the lease and sublease of real estate and movable property in the territory of the Republic, as well as fees based on services, regardless of the place of their provision or use, i.e. the place where they will be provided or used, the withholding tax shall be calculated and paid at the rate of 25%.
In this regard, we point out that the payer (domestic company) is obliged to calculate and pay the withholding tax to the public revenue account within 3 days from the day the consideration is paid.
Thus, by introducing the obligation to pay withholding tax, the legislator made the legal tax evasion from earlier periods taxable, thereby making impossible the transactions that were carried out with the aim of avoiding tax payment, without tax consequences.
We emphasize that before the introduction of withholding tax on considerations and fees paid by domestic companies to non-resident legal entities headquartered in preferential tax systems, was completely legal – it was a legal tax evasion.
Types of services that generate the obligation to pay withholding tax
Analysing the cited provision of the Law, it follows that the obligation to pay withholding tax exists in the case of payment to a non-resident legal entity based in the preferential tax system, based on:
- royalties (franchise, license, know-how),
- compensation based on the lease and sublease of immovable and movable property on the territory of the Republic of Serbia,
- compensation based on the services provided (regardless of the place of their provision)
Accordingly, in addition to royalties and lease fees, the Law explicitly includes the provision of all types of services regardless of the place of provision/use, which actually represents a legal standard so that the tax administration in each individual case retains the discretionary authority to assess whether there is or there is no obligation to pay withholding tax, which makes only the business of domestic companies with companies from preferential tax systems targeted and subject to frequent tax controls.
In addition, we draw your attention to the fact that taxation can also occur in the case when the goods are purchased from a non-resident legal entity from the territory with a preferential tax system, if the goods are owned by the customer from Serbia during transport, but the organization of the transport is taken over by the supplier, and based on this, the supplier invoices the transport separately.
Practically, if a non-resident company based in the preferential system organizes the delivery of goods and initially bears the costs of transportation, and then invoices the customer for that amount, the customer will be obliged to calculate and pay withholding tax for the delivery amount, given that the organization of transportation can also be subsumed under the provision of services.
Also, by paying for licenses that transfer the right to use the brand to a domestic company, it basically constitutes a License Agreement defined by the Law on Obligations. With this agreement, the licensor undertakes to grant the licensee the use of technical knowledge, trademark, experience, etc., and the licensee undertakes to pay compensation for this.
Since that shall be interpreted as the transfer of property rights derived from industrial property rights, we consider that the fee for the use of the license is a “royalty” in the sense of the Law, and there is an obligation to pay withholding tax for each separate payment. Also, compensation for those elements of brand usage that are not at the same time the subject of copyright protection, is compensation for services provided and is subject to taxation.
Exemptions from the obligation to pay withholding tax
Exceptions from the obligation to pay withholding tax are prescribed in Article 40a of the. However, it is questionable how realistic it is to fulfil the prescribed conditions.
Namely, the mentioned article stipulates:
When calculating the withholding tax on the income of a non-resident, the payer of the income applies the provisions of the agreement on the avoidance of double taxation, provided that the non-resident proves the status of a resident of the country with which the Republic has concluded an agreement on the avoidance of double taxation and that the non-resident is the ultimate beneficial owner of the income.
The status of a resident of the country with which the double taxation avoidance agreement was concluded in the sense of paragraph 1 of this article is proved by a non-resident with a certificate of residency in accordance with the law regulating tax procedure and tax administration.
Therefore, in order for the right to exemption from withholding tax to be realized, the payer (domestic company) would be obliged to prove that the non-resident company from the preferential tax system actually has the status of resident of the country that has concluded an agreement on avoiding double taxation with the Republic of Serbia, and which country is not on the list of systems with preferential tax jurisdiction.
In addition, it is also necessary that the provisions of such an agreement on the avoidance of double taxation concluded by Serbia and a third country are in favour of the company, as well as to prove that the non-resident is the real owner of the income.
Transfer prices
An additional obligation when doing business with companies from preferential tax systems is provided by the Law, Article 59 and Article 60. Namely, the transfer price is considered to be the price created by the creation of obligations between related parties. In this regard, any non-resident legal entity from a jurisdiction with a preferential tax system is considered a person related to the taxpayer.
Furthermore, the taxpayer is obliged to attach documentation to the tax balance sheet in which, together with the transactions to which the transfer price is linked, the value of the same transactions at the prices that would have been realized on the market for such or similar transactions if it was not about “related parties” (report on transfer prices), as well as to include positive differences in the tax base if these two prices differ.
Criminal Liability Due to Non-Payment of Withholding Tax
As a result of the previously stated points of view, it is essential to point out that in the case of non-payment of withholding tax at the rate of 25%, after the tax authority has carried out a tax control procedure and possibly determined outstanding tax liabilities based on withholding tax, there is a certain risk of initiating criminal proceedings before the public prosecutor’s office, which the tax authority initiates ex-officio by filing a criminal complaint (depending on the amount of unpaid tax liability), considering that non-payment of withholding tax is prescribed as a criminal offense.
In this regard, Article 226 of the Criminal Code of the Republic of Serbia prescribes the criminal offense of non-payment of withholding tax:
(1) The responsible person in a legal entity – tax payer, as well as an entrepreneur – a taxpayer who, in order to avoid paying withholding tax, contributions for compulsory social security withholding or other prescribed duties, does not pay the amount calculated on behalf of the tax after deduction, i.e. contributions for mandatory social insurance after deduction, to the prescribed payment account of public revenues or fails to pay other prescribed duties, will be punished by imprisonment for up to three years and a fine.
(2) If the amount of calculated and unpaid tax, i.e., contribution referred to in paragraph 1 of this article exceeds one million and five hundred thousand dinars, the perpetrator will be punished with imprisonment from six months to five years and a fine.
(3) If the amount of calculated and unpaid tax, i.e., contribution from paragraph 1 of this article exceeds seven million five hundred thousand dinars, the perpetrator will be punished with imprisonment from one to ten years and a fine.
What is important in relation to this criminal act is the fact that when committing this act, there must be an intention on the part of the perpetrator to commit it, and in the possibly initiated criminal proceedings, the subjective element of this criminal act – the existence of intent – would have to be determined.
Conclusion
It follows from the above that the operations of domestic companies, which base their business model on operations with non-resident legal and (or) natural persons, are extremely complex and subject to hidden dangers due to ignorance of tax regulations.
The line between legal business with non-residents and business that carries with it the risk of causing material damage to the company and possibly initiating criminal proceedings is becoming increasingly transparent, and a certain business entity can find itself in an extremely unfavourable situation after just one business transaction.
If, in addition to all the legal and tax risks, we consider that certain entities did not include in the initial calculation the obligation to pay a withholding tax of 25% on the base amount, it is undeniable that such entities can find themselves at the very edge of their business.
Therefore, in doing business with non-residents, especially from tax havens, it is necessary to get good advice on the topic of the tax implications of the transaction, because otherwise there is a risk of illegal business, which can lead to negative consequences for both the company and its management.
Our team is at your disposal for all questions related to the tax implications of international cooperation.
Recent Comments