Amendments to Tax Laws in the Region

Tax laws in Serbia were amended at the end of 2019 and entered into force 2020, with the most significant change affecting the status of entrepreneurs. Significant amendments to tax laws were also made in North Macedonia and Slovenia. Bosnia and Herzegovina signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), and Montenegro amended the Law on Fiscalisation. Amendments to tax laws in 2020 were also announced in Croatia.

Bosnia and Herzegovina

Bosnia and Herzegovina Signs MLI

In October 2019 after all approvals from the relevant entities had been obtained Bosnia and Herzegovina (B&H) signed the MLI. However, the MLI still hasn’t been ratified in the B&H Parliament, nor did it enter into force.

The MLI will modify tax treaties between two or more parties to the relevant double tax treaty in order to implement BEPS measures. The parties may develop consolidated versions of relevant treaty modified by the MLI.

Amendments to Income Tax and Contributions Laws Expected

Currently, the are drafts on the Law on Personal Income Tax (PIT Law) and Law on Contributions (LC) in the Federation of Bosnia and Herzegovina (FBH).

Draft of the PIT Law brings important changes with regard to the tax rates and taxable amounts. The intention behind adopting amendments to the PIT Laws is to reduce the burden on the employers.

Under the proposed amendments, the tax rates would be:

• 10% up to BAM 800 monthly income,
• 13% over the BAM 800 monthly income.

However, due to the personal deductions prescribed by the draft, income up to BAM 800 could result in being a non-taxable amount.

Proposal of the new LC in FBH prescribes that food compensations, annual leave compensations, and other compensations will become subject to contributions (including premiums, bonuses, awards which employer provides to the employee and which are, currently, non-taxable).

According to the proposed amendments, contribution rates in comparison to the current one are:

Amendments to both the PIT Law and LC have just entered the procedure in the parliament.

Croatia

Since 2016, the Croatian tax system has experienced three cycles of tax reforms with the intention of relieving the taxation burden on companies and citizens concerning all tax forms. In July 2019 the Prime Minister and Minister of Finance of the Republic of Croatia have introduced new tax measures in the Croatian tax system which will bring changes in legislation starting in 2020. The anticipated law novelties can be divided into 5 main points.

The Government’s proposal objective is to completely unburden young people under the age of 25 of paying personal income tax, while the tax liability will be reduced by 50% for people from 26 to 30 years old. The basis for the application of the measure will be the year in which a taxpayer is born, instead of the date of the taxpayer’s birth. The goal of this demographic measure is to keep the young working population in Croatia and to battle the growing emigration issue.

Tax rate on the corporate income for entrepreneurs with an annual income below HRK 7,5 million will come down to 12%, instead of the current 18%. In other words, not only undertakings with the annual income of HRK 3 million will have a decreased rate, but the additional group of 10,000 companies will be included in this benefit. The mentioned tax group will cover 93% of Croatian companies in the market.

The range of non-taxed benefits that employees receive from their employers will enlarge with the enactment of the new tax reform. Receipts on the basis of covering the costs of employees’ accommodation, as well as the food costs for all employees not exceeding the amount of HRK 12,000 per year will be subject to tax exemption. The costs of additional health insurance and pre-school regular care of employee’s children are also exempted. The amount of non-taxed rewards acquired for out of office work will increase from HRK 170 to 200. Finally, the new exemptions will be applied for employees’ receipts for the expenses regarding the use of hospitality and tourism services on their vacations (not exceeding the amount of HRK 2,500) and the financial compensation for employees’ accommodation and food (not exceeding the amount of HRK 5,000).

In order to improve the competitiveness of carriage of goods and passengers’ by rail on the market, the proposed tax reforms entail the return of excise tax paid for diesel fuel. This tax measure will equalize the taxation position of the road and rail sector dealing with carriage of goods and passengers. Furthermore, the rail sector will not be required to pay excise tax on electric energy.

The law proposal calls for a new method of tax calculation on non-alcoholic beverages in an effort to accomplish public health goals for the population. With the start of 2020, the tax will be paid in accordance with the amount of added sugar content, as opposed to the previous method in which the tax liability depended on the produced hectolitre amount of non-alcoholic beverage. The Government has also foreseen further increase of excised taxes on tobacco products and alcoholic beverages.

Montenegro

Montenegrin Law on Fiscalisation in the Supply of Goods and Services (Law on Fiscalisation) entered into force on 1 January 2020.

The legislators recognized the necessity for adopting a new law in order to establish a modern and adequate system that will improve and secure the availability of data on the supply of goods and services.

Main goals legislators strive to achieve under the new law are:

• efficient control of transactions,
• gradually reducing tax administration procedure and,
• creating conditions for efficient managing of tax control and enforcement procedures.

One of the significant novelties is the electronic data transfer between taxpayers and Tax Administration regardless of the payment method.

The taxpayer, within the meaning of this law, is:

• a natural person – taxpayer of personal income tax, obliged to issue receipts for the delivery of goods or services,
• a legal entity – taxpayer of corporate income tax in accordance with the law on corporate income tax, obliged to issue receipts for the delivery of goods or services and,
• an entity who is not obliged to issue a receipt in accordance with the law governing value-added tax (VAT), for the supply of goods or services through self-billing devices (vending machines).

Furthermore, taxpayers are obliged to establish and maintain electronic data transfer from the payment device they use to the IT system of the Tax Administration. Data is being transferred prior to issuance of receipt to the customer and upon obtaining confirmation on transfer from the side of Tax Administration. Once this procedure is completed, the taxpayer issues a receipt.

North Macedonia

Law on Value Added Tax – Authentic Interpretation and Amendments

The Assembly of North Macedonia provided an authentic interpretation to a provision of the Law on Value Added Tax (VAT Law) regulating the place of supply of advertising and electronic data processing services on the initiative of the Macedonian ICT Chamber of Commerce – MASIT and the International NGO “Macedonia 2025”.

MASIT elaborated that the need for such interpretation arose based on the analysis of the issues which companies deal with in terms of the VAT treatment of exported services.

The authentic interpretation provides the following:

• Services in the field of advertising and public relations, which include customer care services for advancing sales, digital marketing, targeting of potential clients, creating promotional material, and social media management (creating, support and execution of strategy),
• Services for electronic data processing and providing of information, including know-how and expertise, which include technical support for software and hardware settings, remote automated technical services, database interventions – input, addition, amendment, managing, updating website data, backend administrative work, and creating reports.

In addition, the recent amendments of the VAT Law increased the threshold for registration as a VAT taxpayer from MKD one million to MKD two million. Furthermore, the period in which a taxpayer is obligated to stay in the VAT system is reduced from five to three years. With this, natural persons and legal entities which do not exceed the newly established threshold will be able to voluntarily deregister from the VAT system.

Corporate Income Tax

The corporate income taxpayer has to submit a report on business and financial transactions with related parties until 30 September the current year for the previous year. The taxpayer may submit either a:

• full report,
• brief form report if certain criteria are met.

There is no obligation to submit this report if the transactions are conducted only between residents of North Macedonia, as well as if the taxpayer has generated a total annual income of up to MKD 300,000,000 (approx. EUR 4,879,000).

The Transfer Prices Report Rulebook[1] is also introduced and prescribes the form and content of the report, as well as the methods on establishing the price of the transaction in accordance with the arm’s length principle.

The report has to contain:

• information on the group of multinational companies (Master File),
• information on the taxpayer (Local File), and (iii) attachments.

The short-form report contains information on each category of transactions, i.e. group of the same type of transactions, including the description and value of the transactions and the associated entity with which these transactions were concluded.

The taxpayer chooses the most appropriate method on establishing the price of the transaction between the associated entities in accordance with the arm’s length principle for each category of transactions, with the possibility of combining methods on a case by case basis.

The Transfer Prices Report Rulebook describes the following methods:

• Comparable uncontrolled price method,
• Pre-sale price method,
• Price of cost method,
• Transactional net margin method, and
• Profit distribution method.

There is no hierarchy between methods, so the taxpayer can choose the most appropriate method for analysis.

Law on Motor Vehicles Tax

The Law on Motor Vehicles Tax entered into force in December 2019 and began to apply as of January 2020 with the intention to discourage the purchase of environment-polluting and energy inefficient vehicles.

Tax will be calculated upon the price of the vehicle upon import i.e. the sale price, as well as considering the amount of carbon dioxide (CO2) emissions. This makes eco-vehicles that have a lower rate of CO2 emissions economically worthy of purchase instead of vehicles that have a higher rate of pollution.

Amendments to the Law on Personal Income Tax

With the latest amendments to the Law on Personal Income Tax (PIT Law), progressive taxation of personal income is put on hold for 36 months starting 1 January 2020. The PIT Law amendments from 1 January 2019 introduced progressive tax rates for work-related income (such as salaries, pensions, etc.), income from copyrights and related rights, income from an independent activity and income from the sale of agricultural products (Labour Income). With the amendments of the PIT Law, Labour Income will be subject to tax at a flat tax rate of 10% until January 2023 regardless of the tax base amount.

The tax rate of 15% which currently applies to capital income, i.e. income from PI rights, income from leasing and subleasing, income from capital (dividends, interest), capital gains (gains when selling or exchanging real estate, securities, and other property), income from insurance and other income (e.g. income from online trade), is also on hold for the time being in favour of a 10% flat tax rate.

In addition to the above, taxation of capital gains from securities and shares issued by investment funds will begin to apply in 2023. Two tax rates are introduced, depending on the period of possession of the securities and shares:

• 15% tax rate for capital gains from securities and shares issued by investment funds, which their holders keep for a period of one year; and
• 10% tax rate for capital gains from securities and shares issued by investment funds, which their holders keep for one to 10 years.

Individuals who keep securities and shares issued by an investment fund, as well as securities acquired through an initial public offer for longer than 10 years will be exempted from the capital gains tax at sale.

Serbia

The engagement of entrepreneurs was widely seen as the most optimal solution to the engagement of individuals in Serbia by local as well as foreign entities. In principle, the income of entrepreneurs was subject to tax by a marginal rate between 5% and 20%. Amendments to the Serbian Personal Income Tax Law (PIT Law) brought a significant change, by introducing the so-called “test of independency” in order to limit the engagement of entrepreneurs in cases where the relationship with the principal is more likely to be regarded as employment.

According to the amendments, the compensation paid to entrepreneurs after 1 March 2020 will be regarded as other income and it will be subject to income tax at a rate of 20% as well as social security contributions at a rate of 25.5% if five out of nine following conditions would be met:

• the principal or its related party determines the working hours for an entrepreneur, and compensation is not reduced during vacation days,
• an entrepreneur uses facility provided by the principal or its related party, or carries out work in the place designated by the principal,
• the principal or its related party arranges training for professional education and specialization of an entrepreneur,
• principal engaged an entrepreneur after advertising by means of public information, or by engaging a headhunting service provider,
• the principal or its related party provides its own working equipment or finances its purchase, or it commonly manages the working process of an entrepreneur,
• entrepreneur generates at least 70% of its income from one principal or its related party,
• entrepreneur conducts the same business activity as the principal or its related party, and agreement on engagement does not prescribe that an entrepreneur takes a common commercial risk for the product delivered to the client,
• engagement agreement between principal and entrepreneur prevents entrepreneur to carry out activities for other principals, except partial prevention related to providing of services to narrow the number of principal’s direct competitors,
• entrepreneur conducts its activity for one principal or its related party continuously or with interruptions for at least 130 working days within 12 months period.

If an entrepreneur is engaged by the local entity, the tax liability would be on that local entity that should report and pay the income tax and contributions by withholding. If an entrepreneur that failed the test was engaged by a foreign principal, the entrepreneur himself/herself is liable for payment and reporting of the tax.

Simultaneously with the test of independency, amendments also introduced tax exemptions for the employment of persons who had a status of entrepreneurs during 2019. Individuals who were engaged as entrepreneurs in 2019 and local employer engages them under employment agreement until 30 April 2020, may be exempted from a significant portion of salary tax. At the same time, Amendments to the Law on Mandatory Social Contributions (SSC Law) introduced an exemption from social contributions under the same conditions as PIT Law.

The exemption is granted in the following manner:

• for salaries paid in 2020 – exemption in the amount of 70% of salary tax and 100% of contributions for pension and disability insurance,
• for salaries paid in 2021 – exemption in the amount of 65% of salary tax and 95% of contributions for pension and disability insurance, and
• for salaries paid in 2022 – exemption in the amount of 60% of salary tax and 85% of contributions for pension and disability insurance.

Exemptions are not available for individuals working in Serbia who are directly engaged by a foreign employer.

However, exemptions from salary tax and the SSC until the end of 2022 are also available to individuals who had a status of entrepreneurs in 2019, and who establish their own companies (e.g. limited liability company), and become employed by such companies by 30 April 2020.

Exemptions are also available for the employment of individuals who were unemployed and who were not registered as entrepreneurs during 2019 if they are employed until the end of 2020.

Amendments to the PIT Law also introduced the following tax exemptions:

• three years’ salary tax exemption and exemption from social contributions for the salary of a shareholder who holds at least 5% of share in a start-up company, provided that the exemption is limited to the monthly salary of approx. EUR 1,200 (the excess is subject to tax and contributions),
• reduction of the base for salary tax and social contributions in the amount of 70% for five years in case of employment of repatriated individuals, provided that the salary of an individual is higher than approx. EUR 1,100 or EUR 1,800 depending on the conditions met by the individual in a particular case,
• tax exemption of income generated by a non-resident working in Serbia for less than 90 days in a year, if such income is received from other non-resident company that does not carry business in Serbia, and
• tax exemption for cost compensations to individuals who participate in programs of European Union or other international organization in the area of education, training, sport, work with youth, science, research, and innovation.

It is expected that the “test of independency” as well as new tax exemptions will mainly affect the IT industry.

Slovenia

Recently, the Slovenian legislation has gone through substantial tax reform, implementing changes in the field of Personal Income Tax (PIT), Corporate Income Tax (CIT) as well as the provisions of the tax procedure. Changes have already been adopted by the Slovenian National Assembly and entered into force as of January 1, 2020.

Personal Income Tax

Personal Income Tax Law (PIT Law) changes pursue the aim of relieving the tax burden of middle-class incomes and restructure the burdens in a way to impose higher taxation on capital income. In this regard, new legislation predicts certain changes of PIT brackets, which will be valid from January 1, 2020, onwards. The tax rates for two brackets are reduced from 27% to 26% and 34% to 33%, while changes are related also to the thresholds for classification into brackets.

For more details, please see the table below.

From January 1, 2020, onward a general PIT relief available for reduction of annual personal income tax liability for all resident taxpayers is increased to EUR 3,500.00 from EUR 3,302.70. For taxpayers whose total income in a given tax period does not exceed EUR 13,316.83, additional PIT relief could be used.

In terms of the tax burden restructuring from the employment income to the tax on capital income, followed by the respective legislation changes, tax rates applicable for capital income, i.e. capital gains, dividends, interest and leasing of property, are increased from 25% to 27.5%.

For the leasing of property, the percentage of standard expenses deductible for tax purposes are increased from the current 10% to 15%.

Legislation amendments also entail changes of tax rates applicable for capital gain taxation, with respect to the duration of ownership of shares, subject to disposal. With respect to the ownership duration, capital gain tax rates can be reduced and taxed in line with the following rates:

• until 5 years: 27.5% (previously 25%),
• from 5 to 10 years: 20% (previously 15%),
• from 10 to 15 years: 15% (previously 10%),
• from 15 to 20 years: 10% (previously 5%), and
• from 20 years onwards: 0% (remains the same).

From January 1, 2020, onward tax base for business activity income, which Slovenian individuals achieve, can be reduced up the maximum amount of 63% of the tax base on the basis of tax reliefs and tax losses carried forward from previous periods. Legislation which was in force until the end of 2019, provided no limitations in this regard.

Corporate Income Tax

After launching of the BEPS (Base Erosion and Profit Shifting) project and the subsequent adoption of the EU Directive 2016/1164/EU, laying down rules against tax avoidance practices that directly affect the functioning of the internal market, certain actions were implemented in the Slovenian legislation for the prevention of tax avoidance strategies that exploit gaps and mismatches in tax rules over different jurisdictions.

• Hybrid mismatches. Legislation changes introduce mechanisms to tackle hybrid mismatches that occur when a financial instrument used by the taxpayer with its related entities has different tax characterization in two or more jurisdictions, thus leading to certain tax benefits for taxpayers and their related company arrangements.
• Exit taxation. Legislation amendments introduce taxation of hidden reserves in cases where the taxpayer transfers its business assets or tax residency from Slovenia to another country. Hidden reserves are identified as a difference between the fair value of the assets and their tax value at the time of their transfer. Thus, the new legislation imposes taxation of the economic value of the potential capital gains created in Slovenia, although such capital gains were not yet realized at the time of their exit. Subject to certain conditions, new legislation allows the taxpayer to apply for the delay of the tax payment related to the transfer of hidden reserves in the maximum amount of 5 annual equal instalments.

Legislation amendments also entail certain changes with respect to depreciation rates for tax purposes for operating lease arrangements. Respective changes are connected to the amendments of International Accounting Standards (IFRS 9). For the assets received by the taxpayers through an operational lease, the highest depreciation rate that could be applied for tax purposes would reflect the actual depreciation period of the asset in question, i.e. a right for the usage of the asset in the operational lease. Respective changes of the depreciation rates will have an effect from January 1, 2020, onward.

Legislation amendments introduce limitations for the usage of tax reliefs and tax losses. Based on new provisions, from January 1 2020 onwards, the tax base of the taxpayers can be reduced with tax reliefs and tax losses carried forward only up the maximum amount of 63% of the tax base. With this, Slovenian legislation introduces a type of minimal effective CIT rate.

Tax Procedure Changes

Tax procedure legislation changes were adopted to harmonize the tax procedure with the PIT Law and CIT Law changes. In this regard, the following changes were introduced:

• changes of Tax Procedure Act to reflect the PIT Law amendments,
• new procedure for exit taxation to comply with the EU Directive 2016/1164/EU, and
• changes in procedure for claiming tax benefits arising from the Double Tax Treaty for Slovene source income, which is deriving from the “tax transparent” agreement, based on the legislation of the country with which Slovenia has concluded the respective Treaty. Non-residents will be allowed to claim the benefit from the Treaty, in line with the new provisions, only through the tax refund procedure.

[1] “Rulebook on the Form and Content of the Report for Transfer Prices, Types of Methods for Establishing the Price of the Transaction in accordance with the “Arm’s Length” Principle and the Method on their Use”

The information in this document does not constitute legal advice on any particular matter and is provided for general informational purposes only.