In practice, there are frequent cases of “mixed” foreign services being provided to legal entities from the Republic of Serbia, so determining tax treatment of fees paid by residents to non-residents is always a complex issue. It is necessary to have all relevant information, in order to correctly determine the character of the foreign service according to its essence and at the same time tax treatment.
Concerning the fee that a resident pays to a non-resident for a software license, the first step would be to qualify the software. The software qualifies as a copyright work, because the Law on Copyright and Related Rights stipulates that, copyright works are especially written works, which, among others, include computer programs with accompanying technical and user documentation in any form of their expression, including preparatory material for their production, etc. Therefore, fees that are paid are considered as royalties.
The Law on Corporate Income Tax (hereinafter: “CIT Law”) stipulates that if a non-resident legal entity realizes income from a resident legal entity in regard with fees for copyright and related rights and industrial property rights (hereinafter: “royalties“), legal entity from the Republic of Serbia is obliged to calculate and pay corporate income tax by withholding.
In addition, when determining the obligation to pay corporate income tax by withholding and at the same time which tax rate will be applied, it should be examined whether the non-resident is from a jurisdiction with a preferential tax system (hereinafter: “Tax heaven”) or from a country which concluded double taxation treaty (hereinafter: “DTT”) with Serbia or from some other country.
Tax rate provided by the CIT Law is 20% of the gross amount of royalties, but if a non-resident proves the status of a resident of the country which has a DTT with Serbia, as well that it is actual owner of income, then the provisions of DTT and the tax rate prescribed by DTT should apply. The gross amount of royalties paid by a domestic legal entity to a non-resident from Tax heaven country is taxable by withholding tax at the rate of 25%.
On the other hand, in addition to royalties for software licenses, resident legal entities often pay to non-resident legal entities services fees for maintenance and/or improvement of software, that do not have the character of royalties and are not subject to withholding tax.
Therefore, in case of “mixed” foreign services (when payment is made for a software license, as well for software maintenance and/or improvement), the non-resident entity should issue two (2) invoices to the resident entity, one for software maintenance and/or improvement, and the other invoice for use of software license.
Finally, from the aspect of the Law on VAT, transfer, assignment and rental of copyrights and related rights – licenses, as well as other intellectual property rights is considered as supply of services, which certainly characterizes the maintenance and/or improvement of software.
Therefore, based on the place of services supply rules, which are prescribed by the Law on VAT, it should be determined who is tax debtor, provider or recipient of services. In case it is a domestic legal entity, it will be obliged to apply VAT reverse charge regime, but at the same time it can deduct the calculated VAT as the preliminary tax (input VAT).
Author: Goran M. Ćiraković, attorney-at-law
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