The transfer of shares in a company is a legal action that can have significant tax consequences, especially for individuals – residents of the Republic of Serbia. A proper understanding of the tax treatment of transaction is crucial in order to avoid unwanted risks in the proceedings before the Serbian tax authorities.

In the rest of the text, we have analysed the relevant legal provisions and practice.

1. Taxation of capital gains – basic rules

According to the provisions of the Law on Personal Income Tax (“LPIT”), the capital gain represents the difference between the sale price of the share and its purchase price, realized by transfer.

The capital gains tax rate is 15%, and the obligation to submit the appropriate tax return arises at the moment when the monetary remuneration (or its part) for the transfer of shares is paid or made available to the transferor. The deadline for submitting a respective tax return is 30 days from the date of receipt of income (or part of income).

According to the LPIT, the following are considered the share transfer:

  • sale of shares (the most common form) or other transfer with monetary or non-monetary remuneration (exchange, gift, etc.), as well as
  • non-monetary contribution into a legal entity.

2. Exemptions from taxation

The LPIT provides exceptions to the taxation of capital gains, among which the most widely applicable is that the difference realized by the share transfer is not considered a capital gain, if the share was continuously owned by the taxpayer for at least ten (10) years before the transfer. An important condition for the application of this exception is that the individual must own the same percentage of shares continuously during the specified period.

The LPIT also provides exemption from taxation in case of share transfer between (i) spouses (including transfer between divorced couple if it is related to divorce) or direct blood relatives (e.g. parents-children), as well as (ii) when the share is acquired by inheritance in the first line of succession (e.g. a child inherits a parent’s share and then sells it to a third party).

Exemption from taxation does not apply if the founder/member of the company transfers his/her share to the company, i.e. when the company acquires its own shares (the so-called purchase of shares by the company itself).

From the perspective of the Property Tax Law, the transfer of shares in a company for monetary remuneration is not subject to tax on the transfer of absolute rights.

3. Does the place of payment of the monetary remuneration possibly affect the capital gains tax?

The fact that the sale price for the share is paid to a bank account in Serbia or abroad has no special effect on the tax treatment and fulfilment of the conditions for exemption.

For proper tax treatment, it is important to first determine whether the person transferring the share and receiving the monetary funds has the status of a Serbian tax resident for a said transaction.

Therefore, it should also be noted that, for example, a Serbian taxpayer who owns a share capital in a foreign company due to sale of its share would have the right to obtain a tax exemption under the conditions of the LPIT.

4. Special caution – share transfer without monetary remuneration

In certain situations – e.g. in the case of the transfer of shares without remuneration from a company to an individual who is employed in that company, such transfer under certain conditions may be treated as salary and, accordingly, cause the obligation to calculate and pay income tax and related contributions for mandatory social insurance.

On the other hand, the transfer of shares without remuneration from a company to an individual who is not employed by that transferor can be treated as the income of that individual if such share transfer represents counter-service of the company-transferor for work engagement, knowledge and/or service of that individual. Such transaction should be subject to personal income tax as other income.

5. Tax treatment of the transfer of shares in legal entities

Unlike individuals, when a legal entity sells a share (e.g. a certain llc sells its share that it owns in another llc), the realized capital gain represents taxable income that enters the tax balance and is taxed at the rate of corporate income tax (currently 15%).

If a non-resident legal entity sells its share in Serbia to another Serbian legal entity and realizes a capital gain on that occasion, a tax rate of 20% is applied to taxation, unless an international treaty on the avoidance of double taxation provides otherwise.

6. Principle of factuality – how the Tax Administration observes transactions

The Law on Tax Procedure and Tax Administration contains the principle of factuality, which requires that tax facts should be determined according to their economic essence, and not only according to the formal contract.

This means that the Tax Administration in entitled to assess whether a different economic reality is hidden behind the formally presented transaction (for example, a transfer without monetary remuneration that actually represents a fee-countermeasure for a service).

Author: Goran M. Ćiraković, attorney-at-law

Photo: Pixabay.com | heinzremyschindler