1

Doc. Dr Svetislav V. Kostić

University of Belgrade Faculty of Law

EATLP Congress 2017

“Corporate Tax Residence and Mobility”

Serbia

1. (Tax) residence in the domestic concept

1.1. Civil law, corporate law and other non-tax areas

Under Serbian corporate legislation companies acquire the status of a legal entity by virtue of

registration in the Business Entities Register,1 while the seat (sedište) of a company is defined as

the place in the territory of Serbia from which the business of a company is managed and which

is as such designated in the founding acts of a company or by virtue of the decisions of the

company’s general meeting.2 Thus, it can be concluded that companies whose seat is in Serbia

can be granted the status of a legal entity under Serbian corporate legislation. Such a conclusion

was questionable under Serbian corporate legislation in force prior to the enactment of the 2011

Corporations Act,3 as in it we find a more elusive definition of the company’s seat:

(1) The seat of a company is the place from which it’s business is managed.

(2) The seat of a company is designated in the founding acts of the company and is registered in

accordance with the legislation governing the registration of companies.4

1 Art. 3 of the Corporations Act [Zakon o privrednim društvima], Official Gazette of the Republic of Serbia, no.

36/2011, 99/2011, 83/2014, 5/2015 (hereinafter : 2011 Corporations Act). 2 Art. 19 of the 2011 Corporations Act.

3 Corporations Act [Zakon o privrednim društvima], Official Gazette of the Republic of Serbia, no. 125/04

(hereinafter: 2004 Corporations Act) and Enterprises Act (Zakon o preduzećima), Official Gazette of the Republic of

Serbia, no. 29/1996, 33/1996, 29/1997, 59/1998, 74/1999, 9/01, 36/2002. 4 Art. 16 of the 2004 Corporations Act.

2

Namely, prior to the introduction of the 2011 Corporations Act Serbian corporate legislation

does not contain any reference as to the issue does the seat of a company needs to be in Serbia in

order for it to be allowed to be incorporated – registered in Serbia.

Although we have not yet seen examples of companies whose seat is outside of Serbia

attempting to incorporate under Serbian legislation (which makes the above stated issue purely

theoretical), a more practical dilemma we are faced with is whether Serbia adopts the

incorporation criterion or the real seat criterion for determining the lex societatis of a company.

While dominant Serbian academic literature will state that Serbian corporate legislation adopts

the real seat criterion, as it defines the seat of a company as the place from which the business of

the company is managed,5 such a conclusion is disputed to a point by some sources.

6 What

should be taken into consideration is that there is an obligation to register the (real) seat of the

company, while the Business Entities Register will not, in the process of registration, scrutinize

if the submitted address of the seat of the company is in fact the place from which the business of

the company is managed. Once the company is registered, third parties who rely on the contents

of the Business Entities Register cannot suffer damages from incorrectly registered information.7

Therefore, the real seat criterion is for practical purposes transformed into the incorporation

criterion.8

Serbian international private law stipulates that the nationality of a legal entity is determined

under the law of the state under whose legislation it has been incorporated. If, however, a legal

entity has its real seat (stvarno sedište) in a state other than the one in which it has been

incorporated, and is treated as a national of that other state under its legislation, the legal entity

will be deemed as a national of the state of its real seat.9 Older Serbian international private law

academic literature infers that in principle a real seat of a company may be either in the state

5 M. Vasiljević, Kompanijsko pravo – IX dopunjeno i izmenjeno izdanje, Udruženje pravnika u privredi Srbije,

Beograd 2015, p. 95. 6 T. Jevremović-Petrović, „Državna pripadnost, Lex societatis i sedište privrednog društva“, Pravni život, no.

11/2010, p. 159 - 166. 7 Art. 6(1) of the 2011 Corporations Act.

8 T. Jevremović-Petrović, op.cit., p.166

9 Art. 17 of the Law on Resolving the Conflict of Laws with Other States [Zakon o sprečavanju sukoba zakona sa

propisima drugih zemalja], Official Gazette of the Socialist Federal Republic of Yugoslavia, no. 43/1982, 72/1982,

Official Gazette of the Federal Republic of Yugoslavia, no. 46/96 and Official Gazette of the Republic of Serbia, no.

46/2006.

3

where its principal place of management is situated or where its principle business activity is

performed.10

On the other hand, Serbian jurisprudence sheds no light on the issue of

interpretation of the concept of real seat in Serbian international private law i.e. it does not

answer the question should it be understood as the place from which the business of the company

is managed (i.e. under the seat definition provided in Serbian corporate legislation).

So far we have not seen cases wherein the nationality, within the meaning of Serbian

international private law, or incorporation as such, by virtue of the real seat being outside of

Serbia, of a company has been challenged before Serbian courts or administrative bodies (e.g.

Business Entities Register). An area where these issues may become relevant in the future could

be found in the application of Serbian bilateral investment treaties (BITs). Namely, Art. 3(b) of

the Serbian Model BIT11

defines the investor as a legal entity incorporated, constituted or

otherwise duly organized in accordance with the laws and regulations of one Contracting Party,

having its headquarters in the territory of that Contracting Party and making investments in the

territory of the other Contracting Party. A number of Serbian BITs contain an identical or

similar definition of an investor, requiring a legal entity to be both incorporated in a contracting

state and to have its seat/headquarters in that state in order for it to be allowed to claim BIT

benefits.12

As BITs as a rule do not contain an autonomous definition of the concepts “seat” and

“headquarters”, we would have to revert to domestic legislation in order to understand these

concepts. Therefore it would be relatively easy to imagine a hypothetical situation wherein the

Serbian authorities would attempt to deny the granting of BIT benefits to a company on the basis

of it not having its (real) seat in the contracting state under whose law it has been incorporated.

However, we have no actual examples of such cases in Serbia so far.

10

M. Dika, G. Knežević, S. Stojanović, Komentar Zakona o međunarodnom privatnom i procesnom pravu, Nomos,

Beograd 1991, pp. 62 – 64. 11

The text of the Serbian Model BIT can be found in English at:

http://mtt.gov.rs/download/novi%20tipski%20EN.pdf 12

E.g. Art. 1(1)(2)b of the 2001 Serbia/Austria BIT, Official Gazette of the Republic of the FRY – International

Agreements, no. 1/2002; Art. 1(1)(3) of the 1996 Serbia/Bulgaria BIT, Official Gazette of the Republic of the FRY –

International Agreements, no. 4/1996; Art. 1(1)(3)b of the 2005 Serbia/Cyprus BIT, Official Gazette of Serbia and

Montenegro – International Agreements, no. 14/2005; Art. 1(1)(2)b of the 2002 Serbia/Spain BIT, Official Gazette

of the FRY – International Agreements , no. 3/2004; Art. 1(1)(1)b of the 2001 Serbia/Turkey BIT, Official Gazette of

the FRY – International Agreements, no. 4/2001.

4

An analysis of Serbian legislation shows a variety of approaches towards the issue of a

company’s nationality/residence. Serbian labor legislation will recognize domestic and foreign

legal entities13

, although it will not provide us with guidelines when to deem a company as

domestic or as foreign (thus implicitly reverting us to the provisions of international private law).

The norms governing foreign trade, which also distinguish between domestic and foreign

persons, contain the following definition:

A domestic person, within the context of this Law, is a legal entity, a branch of a domestic or a

foreign legal entity and an entrepreneur, who have their seat or who are registered in Serbia...14

On the other hand, the Serbian Foreign Exchange Law15

defines as resident those legal entities

who are registered and who have their seat in Serbia. However, neither the Serbian Foreign

Trade Law, nor the Foreign Exchange Law16

provide any independent guidance on how to

interpret the concept of “seat” which will be as a rule understood within the meaning given to it

by Serbian corporate legislation. Finally, under Serbian bankruptcy statutes, which follow EU

bankruptcy legislation,17

exclusive competence for conducting bankruptcy proceedings (lex

concursus) is given to Serbian courts in situations where the debtor’s center of main interests

(COMI) is in Serbia, while the COMI is defined as the place where the debtor conducts the

administration of his interest on a regular basis and is as such recognized by third parties. In the

absence of proof to the contrary the place of the registered seat is presumed to be the COMI of a

company.18

An overview of the Serbian approach to defining the nationality/residence of companies shows

that the legislator has a tendency not to separately clarify certain concepts in particular laws and

to rely on their definitions found in other legislation. The concept of “seat” is a good example of

13

Art. 2(1) and Art. 5(2) of the Serbian Labor Law [Zakon o radu], Official Gazette of the Republic of Serbia, no.

24/2005, 61/2005, 54/2009, 32/2013, 75/2014. 14

Art. 3(1) of the Serbian Foreign Trade Law [Zakon o spoljnotrgovinskom poslovanju], Official Gazette of the

Republic of Serbia, no. 36/2009, 36/2011, 88/2011, 89/2015). 15

Official Gazette of the Republic of Serbia, no. 62/2006, 31/2011, 119/2012, 139/2014. 16

Zakon o deviznom poslovanju. 17

Council regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings, Official Journal L 160 ,

30/06/2000 P. 0001 – 0018. 18

Art. 174a of the Serbian Bankruptcy Law [Zakon o stečaju], Official Gazette of the Republic of Serbia, no.

104/2009, 99/2011, 71/2012, 83/2014.

5

such an approach, where it is somehow implied that it should be understood, for the purposes of

applying various laws, within the meaning given to it by Serbian corporate legislation. Such a

state of affairs may and does lead to notable legal problems, as concepts in different bodies of

legislation may infer various meanings despite the same word being used to denote them.

1.2. Tax Law

Similarly to most Central and East European countries, the transformation of the Serbian social,

political and economic environment in the beginning of the 1990s lead to the introduction of new

tax legislation tailored in accordance with standards found in comparative legislation of

developed market economies. In Art. 2 of the 1991 Serbian Corporate Income Tax Law19

we

find the following provision:

(1) The taxpayer from Art. 1 of this Law (hereinafter: taxpayer) is a resident of the Republic of

Serbia who is liable to Corporate Income Tax on the profits generated in the territory of the

Republic, in other republics20

and in other countries.

(2) A resident of the Republic is a taxpayer who is incorporated or has its seat of real management

and control in the territory of the Republic.

The principle that resident companies are subject to taxation on their worldwide income and the

determination of residence of companies on the basis of two alternative criterion have remained a

constant of Serbian tax legislation since their introduction in 1991.

While in the last 26 years the provisions of the above cited Art.2(1) of the 1991 Serbian

Corporate Income Tax Law suffered only amendments which reflected the changes in political

scenery, those found in the second paragraph of Art. 2 of the same law were altered only once

19

[Zakon o porezu na dobit korporacija], Official Gazette of the Republic of Serbia, no. 76/1991. 20

Serbia was at the time one of the six constituent republics of the Socialist Federal Republic of Yugoslavia, all of

which are now independent countries (Bosnia & Herzegovina, Croatia, Macedonia, Montenegro, Serbia and

Slovenia).

6

since their introduction. Namely, in 201221

the criterion seat of real management and control

was transformed into place of real management and control.

The reason which lead the Serbian legislator to replace the term “seat” with the term “place” in

the definition of a resident for corporate income tax purposes was simple: the Serbian tax

authorities have never applied the seat of real management and control criterion in order to

assert that a company not incorporated in Serbia is a Serbian tax resident,22

and the legislator

probably assumed that this state of affairs may be due to an over formalistic approach by the

Serbian tax authorities. In other words, the term “seat” had a formal aura, leading the tax

authorities to follow the registered seat of a company, while the one that replaced it, “place”,

allows for a more relaxed approach by the tax authorities.

Unfortunately, such an assumption and the introduced solution did not deal with the core

problems of Serbian tax legislation interpretation and application. If we take into account that

the Serbian tax authorities have never applied the elusive criterion of “center of business and

vital interests” for determining the residence of individuals23

, i.e. that they have never attempted

to assert that an individual is a tax resident of Serbia purely on the basis of this criterion despite

legal authority to do so, we may come to the conclusion that the Serbian tax authorities are

unwilling and perhaps unprepared to apply residence criterion which require in-depth factual

analysis.

The inability or the unwillingness of the Serbian tax authorities to challenge the tax residence of

foreign conduit companies, even when these are clearly controlled by Serbian residents, lead the

Serbian legislator to find other solutions to combat cross-border tax evasion and in 2012 the first

SAARs targeting tax havens were introduced.24

These SAARs are focused on “non-resident

21

Law on the Changes and Amendments to the Corporate Income Tax Law, Official Gazette of the Republic of

Serbia, no. 119/2012. 22

D. Popović, S. Kostić, „(Zlo)upotreba stranih pravnih lica za izbegavanje poreza u Srbiji“, Anali Pravnog

Fakulteta, Vo. 58, no. 2/2010, p. 51. 23

Art. 7(2)(1) of the Serbian Personal Income Tax Law [Zakon o porezu na dohodak građana], Official Gazette of

the Republic of Serbia, no. 24/2001, 80/2002, 80/2002, 135/2004, 62/2006, 65/2006, 31/2009, 44/2009, 18/2010,

50/2011, 91/2011, 93/2012, 114/2012, 47/2013, 48/2013, 108/2013, 57/2014, 68/2014, 112/2015. 24

Arts. 1, 18 and 39 of the Law on the Changes and Amendments to the Corporate Income Tax Law, Official

Gazette of the Republic of Serbia, no. 119/2012.

7

legal entities from jurisdictions with preferential tax systems” and are dominantly inspired by the

desire to stem tax avoidance of Serbian resident individuals. While the issue of what are

jurisdictions with preferential tax systems was dealt by a broad definition and the granting of

authority to the Serbian Minister of Finance to prepare and publish their list, non-resident legal

entities from these jurisdictions are defined as:

non-resident legal entities incorporated in a jurisdiction with a preferential tax system, or

non-resident legal entities whose registered seat is in a jurisdiction with a preferential tax system,

or

non-resident legal entities whose place of management (seat) is in a jurisdiction with a

preferential tax system, or

non-resident legal entities whose place of effective management is in a jurisdiction with a

preferential tax system.25

The essential idea behind such a definition of a “non-resident legal entity from a jurisdiction with

a preferential tax system” is to avoid dealing with the peculiarities of foreign tax legislations

(e.g. the definition does not deal with the question of whether the non-resident legal entity is in

fact a tax resident of the jurisdiction with a preferential system) and to encompass as many

relevant connecting factors as possible. It should be noted that the Serbian tax legislator did not

expect the Serbian tax authorities to venture into the analysis of where are places of management

or effective management of non-resident legal entities, as it had before it 22 years of experience

to the contrary. The basic idea was to encompass all the criterion which the targeted jurisdictions

would use in their internal legislation to assert the tax or corporate status of legal entities.

However, the reach of the definition is limited by virtue of a provision excluding from its scope

legal entities that are considered tax residents of the other contracting state for the purposes of

application of any of Serbia’s double taxation treaties.26

25

Art. 3a(2) Serbian Corporate Income Tax Law [Zakon o porezu na dobit pravnih lica], Official Gazette of the

Republic of Serbia, no. 25/2001, 80/2002, 80/2002, 43/2003, 84/2004, 18/2010, 101/2011, 119/2012, 47/2013,

108/2013, 68/2014, 142/2014, 91/2015, 112/2015 (hereinafter: CITL). 26

Art. 3a(3) of the CITL.

8

We notice that the definition of the “non-resident legal entity from a jurisdiction with a

preferential tax system” does not use the criterion “place of real management and control” as a

connecting factor. In other words, a criterion (theoretically) used to determine the Serbian tax

residence of companies is not relied on to assert a relevant connection between a non-resident

legal entity and a jurisdiction with a preferential tax system. This may imply (we have no other

sources to rely on apart from the opinion of the author of this report) that the control element in

the residence criterion is understood as essentially referring to ownership. The Serbian legislator

was aware that many tax havens enable the ownership structure to be hidden, while it had no

particular interest in companies truly belonging to persons from these jurisdictions – his targets

were companies controlled by Serbian residents.

Sourcing rules in the CITL are predominantly based on the tax residence of the payer and of the

recipient of specific types of income.27

In other words, if the payer of a certain type of income

(e.g. dividends, interest, royalties) is a resident legal entity, while the recipient is a non/resident

one, Serbian withholding tax applies on the distribution. Although neither Serbian jurisprudence

nor administrative practice contain examples of the tax residence of a company being challenged,

the interaction of the rules applicable to resident and those governing non-resident taxpayers may

shed more light on the consequences of such a hypothetical scenario.

Namely, from the perspective of tax avoidance, formally non-resident companies, whose Serbian

tax residence might be asserted, have been predominantly (ab)used to avoid Serbian capital gains

taxation. However, if we were to establish that they are Serbian tax residents by virtue of their

place of real management and control being in Serbia, this would imply that they would be

obliged to retroactively (with the statute of limitations being 5 years) complete and file Serbian

corporate income tax returns under the rules applicable to resident taxpayers. While these

provisions would require the payment of tax on generated capital gains (15%), they would

completely exempt from taxation dividends received from Serbian resident companies.28

In

other words, such a company might have an underpayment of Serbian corporate income tax on

capital gains, but could also have an overpayment of withholding tax on dividends (the statutory

27

Art. 40 of the CITL. 28

Art. 25(1) of the CITL.

9

withholding tax on dividends is 20%, while no Serbian double taxation treaty provides for

taxation of dividends solely in the state of residence).

The issue of residence may be much more relevant from the perspective of tax evasion of

individuals. Even if, as a result of deeming a company incorporated abroad a Serbian tax

resident by virtue of its place of real management and control being in Serbia, such a company

would only be entitled to a tax refund (as e.g. it had suffered Serbian withholding taxes

applicable only to non-residents), the consequential administrative obligations could be the

source of information relevant for the investigation of potential tax crimes performed by the

owners of the company. Serbian tax resident companies are obliged to withhold Serbian

personal income taxes and submit in this respect required documentation and tax returns.

Therefore, the Serbian tax authorities could by requesting the retroactive performance of

reporting obligations within the 5 years statute of limitations period and demanding insight into

information relevant for assessing these obligations (transfer details, account information,

contracts, etc.) discover unreported payments made to Serbian resident individuals, or to entities

which would qualify as non-resident legal entities from jurisdictions with preferential tax

systems. In the first instance we might be facing criminal tax evasion, while in the second Serbia

could at the very least demand a significant amount of withholding taxes.

Unfortunately, not even the possibilities described above were sufficient to induce the Serbian

tax administration to venture into the application of the “place of real management and control”

residence criterion. Apart from the SAAR described above and the GAAR found in Art. 9 of the

Law on Tax Procedure and Tax Administration29

, Serbian tax legislation does not contain any

other anti-avoidance rules which are based on the question of the residence of the taxpayer (e.g.

Serbia does not have CFC rules in place).

29

[Zakon o poreskom postupku i poreskoj administraciji], Official Gazette of the Republic of Serbia, no. 80/2002,

84/2002, 23/2003, 70/2003, 55/2004, 61/2005, 85/2005, 62/2006, 63/2006, 61/2007, 20/2009, 72/2009, 53/2010,

101/2011, 2/2012, 93/2012, 47/2013, 108/2013, 68/2014, 105/2014, 91/2015, 112/2015, 15/2016.

10

While the Serbian Personal Income Tax Law relies on the concept of residence of companies

from the CITL for the purposes of its norms, the Serbian VAT Law30

recognizes “foreign

persons” (strana lica) as potential suppliers of goods and services and defines them as “persons

who do not have their seat or domicile in Serbia.” As a rule all those companies incorporated in

Serbia will be deemed as domestic persons for VAT purposes (as their incorporation is subject to

their seat being in Serbia), while we are yet to see a company incorporated abroad being treated

as domestic by virtue of its seat being in Serbia (although this would imply that it may have to

incorporate under Serbian law as well).

2. (Tax) residence in an international (cross-border) context

2.1. Residence in (tax) treaties.

Despite the fact that the place of incorporation has always been the decisive factor for

determining corporate tax residence in Serbia, while the alternative criterion of “place (seat) of

real management and control” has never been applied in practice, the Serbian Model Double

Taxation Convention31

adopts the wording of Art. 4.1 of the OECD Model Tax Convention

instead of Art. 4.1 of the UN Model Tax Convention. Furthermore, the Serbian double tax treaty

network does not show consistency with respect to the use of the criterion under which a

company should be subjected to tax liability in a contracting state for it to be eligible for double

tax treaty protection. E.g. if we analyze double taxation treaties concluded by Serbia since 2010,

those with Austria,32

Canada,33

Montenegro,34

Norway,35

Pakistan36

and Tunisia37

follow Art. 4.1

30

[Zakon o porezu na dodatu vrednost], Official Gazette of the Republic of Serbia, no. 84/2004, 86/2004, 61/2005,

61/2007, 93/2012, 108/2013, 6/2014, 68/2014, 142/2014, 5/2015, 83/2015, 5/2016. 31

The Serbian Model Double Taxation Convention is an unofficial document drafted and used by Serbian double

taxation treaty negotiators. Although the document has never formally been made public, academic literature,

whose authors are those very same Serbian double taxation treaty negotiators, mention and cite the provisions of the

Serbian Model Double Taxation Convention. D. Dabetić, Republika Srbija i izbegavanje dvostrukog oporezivanja –

Priručnik za primenu međunarodnih ugovora o izbegavanju dvostrukog oporezivanja, Računovodstvo, Belgrade

2008, p. 74, 75, 79, 80, 82 etc. 32

Art. 4(1) of the 2010 Serbia/Austria double taxation treaty, Official Gazette of the Republic of Serbia – Int.

Agreements, no. 8/2010. 33

Art. 4(1) of the 2012 Serbia/Canada double taxation treaty, Official Gazette of the Republic of Serbia – Int.

Agreements, no. 6/2012. 34

Art. 4.(1) of the 2011 Serbia/Montenegro double taxation treaty, Official Gazette of the Republic of Serbia – Int.

Agreements, no. 10/2011.

11

of the OECD Model Tax Convention, while the ones with Azerbaijan38

and Vietnam39

adopt the

solution from Art. 4.1 of the UN Model Tax Convention. A notable exception is the one

remaining double taxation treaty concluded since 2010, the one Serbia applies with the United

Arab Emirates,40

in whose Art. 4.1 two separate rules with respect to residence are prescribed for

each contracting state, where the one applicable to Serbia follows the provisions of Art. 4.1 of

the OECD Model Tax Convention, while the other applicable to the United Arab Emirates deems

as its residents companies incorporated in the United Arab Emirates.

The described state of affairs testifies that the Serbian double taxation treaty policy makers were

not particularly worried or perhaps aware of the issue if the place of incorporation criterion can

be understood as “any other criterion of a similar nature” for the purpose of application of those

double taxation treaties which follow the OECD Model Tax Convention.41

Serbia will as a rule

view the provisions of double taxation treaties from the perspective of the source state, while in

practice a confirmation from the competent authority of the other contracting state that a

particular entity is its resident for the purposes of applying the relevant double taxation treaty

will end any discussion on the subject. What may be said in defense of Serbia’s attitude is that

the CITL place of incorporation criterion, at least in theory, encompasses the place of

management, as well as statutory seat, as under domestic corporate law only companies which

have their place of real (effective) management in Serbia (seat as per 2011 Corporations Act)

may be incorporated under Serbian law. Thus, for all companies which are incorporated in

Serbia it might be said that it is assumed that their “place of real management and control” is also

in Serbia with the address of such a place registered as the seat of the company.

35

Art. 4(1) of the 2015 Serbia/Norway double taxation treaty, Official Gazette of the Republic of Serbia – Int.

Agreements, no. 21/2015. 36

Art. 4(1) of the 2010 Serbia/Pakistan double taxation treaty, Official Gazette of the Republic of Serbia – Int.

Agreements, no. 8/2010. 37

Art. 4(1) of the 2012 Serbia/Tunisia double taxation treaty, Official Gazette of the Republic of Serbia – Int.

Agreements, no. 6/2012. 38

Art. 4(1) of the 2010 Serbia/Azerbaijan double taxation treaty, Official Gazette of the Republic of Serbia – Int.

Agreements, no. 8/2010. 39

Art. 4(1) of the 2103 Serbia/Vietnam double taxation treaty, Official Gazette of the Republic of Serbia – Int.

Agreements, no. 7/2013. 40

Art. 4(1) of the 2013 Serbia/United Arab Emirates double taxation treaty, Official Gazette of the Republic of

Serbia – Int. Agreements, no. 3/2013. 41

K. Vogel, Klaus Vogel on Double Taxation Conventions – 3rd

ed, Kluwer Law International, London 1997, p. 233.

12

The question of what is the meaning of the expression “liable to tax” found in the residence

article of double taxation treaties has so far not been the topic of any concentrated discussion in

Serbia, while Serbia has not put forward any position with respect to Art. 4(1) of the OECD

Model Tax Convention or its Commentary.42

Furthermore, Serbia has never insisted on the

introduction into its double taxation treaties of anti-avoidance provisions, although it is willing to

adopt them at the request the other contracting state.43

An example of such provisions within the

Serbian double taxation treaty network can be found in Arts. 10(7) - dividends, 11(8) – interest

and 12(7) – royalties of the 2015 Serbia/Norway double taxation treaty, each having an

essentially identical wording:

The provisions of this Article shall not apply if it was the main purpose or one of the main

purposes of any person concerned with the creation or assignment of shares or other rights/debt-

claim/the rights in respect of which the dividends/interest/royalties are paid to take advantage of

this Article by means of that creation or assignment.

The described Serbian attitude towards the question of liability to tax, as well as to anti-

avoidance provisions is surprising if we note the awareness of the general public in Serbia that

foreign companies and double taxation treaties are (ab)used as aggressive tax planning tools. In

other words, conciseness that a problem of tax avoidance and evasion through treaty shopping

does exist, but so far very little is done to combat this problem.

Within the Serbian double taxation treaty network we find one example of a Limitation of

Benefits clause in Art. 28 of the 2012 Serbia/Canada double taxation treaty. Under the heading

“Miscellaneous rules” the aforementioned treaty essentially allows Canada to apply its CFC

rules44

, while generally limiting the entitlement to the benefits it provides for companies on the

basis of the residence of the shareholders and the business activity they perform. However, the

42

Model Tax Convention on Income and on Capital 2014 - Full Version (as it read on 15 July 2014), OECD, Paris

2014, p. P(4) 1 – 3. 43

D. Dabetić, Republika Srbija i izbegavanje dvostrukog oporezivanja – Priručnik za primenu međunarodnih

ugovora o izbegavanju dvostrukog oporezivanja, p. 46 and 48. 44

Art. 28(1) of the 2012 Serbia/Canada double taxation treaty.

13

limitations are centered on companies enjoying a preferential tax regime in their state of

residence.45

Virtually all Serbian double taxation treaties do contain tie-breaker rules for dual resident

companies,46

while these rules usually follow Art. 4(3) of the OECD Model Tax Convention.

However, we have so far never seen the application of those provisions in Serbia, as the

residence of a company has yet to be challenged by the Serbian tax authorities. From 15 July

2005 until 17 July 2008 Serbia reserved the right to, in its double taxation treaties, replace

paragraph 3 of Art. 4 of the OECD Model Tax Convention by a provision that would refer to the

mutual agreement procedure for the determination of the country of residence in case of dual

resident persons other than individuals, and deny the benefits of a respective treaty in the absence

of an agreement between the competent authorities.47

Double taxation treaties Serbia applies

with e.g. Azerbaijan, Latvia,48

Turkey,49

and Norway contain examples where instead of

Art.4(3) of the OECD Model Tax Convention the contracting states adopted a norm which is

similar to the one proposed in Para 24.1 of the Commentary on Art.4(3) of the OECD Model Tax

Convention.50

The 1998 Serbia/Bulgaria51

double taxation treaty is notable in that its tie-breaker

provision for dual resident companies just refers to the mutual agreement between the competent

authorities, without mentioning any of the factors which they should take into consideration in

order to determine the residence of a company for treaty purposes.52

Therefore, despite the fact

that Serbia is just beginning to notice BEPS developments it would be safe to say that it would in

principle be supportive of the recommendation made in OECD BEPS Report on Action 6 to

abandon the tie-breaker provision based on the effective place of management and to leave the

matter to be settled by mutual agreement. On the other hand, Serbia has so far been unwilling to

45

Art. 28(2) and 28(4) of the 2012 Serbia/Canada double taxation treaty. 46

A rare exception to this rule is e.g. the 2002 Serbia/Kuwait double taxation treaty, Official Gazette of the Republic

of Serbia, no. 4/2003, which does not contains a tie-breaker provision. 47

Model Tax Convention on Income and on Capital 2014 - Full Version (as it read on 15 July 2014), OECD, Paris

2014, p. P(4) 1 – 7. 48

2005 Serbia/Latvia double taxation treaty, Official Gazette of the Republic of Serbia, no. 3/2006. 49

2005 Serbia/Turkey double taxation treaty, Official Gazette of the Republic of Serbia, no. 3/2006. 50

Art. 4(3) of the 2010 Serbia/Azerbaijan double taxation treaty, Art.4(3) of the 2005 Serbia/Latvia double taxation

treaty, Art. 4(3) of the 2005 Serbia/Turkey double taxation treaty and Art. 4(3) of the 2015 Serbia/Norway double

taxation treaty. 51

Official Gazette of the Republic of Serbia, no. 1/1999. 52

Art. 4(2)(4) of the 1998 Serbia/Bulgaria double taxation treaty.

14

accept arbitration for the purpose of mutual agreement procedures and it is not likely that this

position will change in the near future.

2.2.Tax implications of cross-border changes of residence

Serbian legislation does not contain any specific rules regarding either corporate immigration or

corporate emigration. In other words, a company “immigrating” to Serbia would have to

incorporate itself as a newly formed legal entity under general rules governing the incorporation

of companies, wherein specific assets contributed into the capital of such a legal entity would be

appraised or their value would be agreed upon by its founders.53

Similarly, a company desiring to “emigrate” from Serbia (e.g. a company which would move its

real seat to another country) would have to be winded-up (liquidated), while its assets could be

disposed by the shareholder following the process of dissolving the company. While Serbian

legislation does not provide for either exit or trailing taxes, liquidation proceeds above the value

of the contributed capital are deemed as a dividend for tax purposes. If a Serbian resident

company is owned by other Serbian legal entities, such a dividend would be exempt from

corporate income taxation.54

If, however, the shareholders are individuals, regardless of their

residence, or non-resident legal entities, the distribution of the liquidation proceeds (the dividend

distribution) is taxable.55

So far EU law did not influence domestic legislation and administrative practice in Serbia56

with

respect to corporate immigration/emigration and it would be safe to assume that the tax legislator

will wait for changes to be first introduced in corporate legislation and then follow these

developments in tax laws.

2.3.Policy issues

53

Arts. 50 of the 2011 Corporations Act. 54

Art. 25(1) of the CITL. 55

Art. 40 of the CITL and Art. 61 of the Serbian Personal Income Tax Law respectively. 56

Serbia is not a member state of the EU and while it is a candidate country the time-frame of the process of

accession, or its success are not certain, particularly taking into consideration the current internal crisis the EU is in.

15

The described state of affairs with respect to the attitude of the Serbian tax authorities in

determining or challenging the tax residence of companies is even more perplexing if we take

into account the attention given to cross-border tax avoidance and evasion by Serbian politicians

and media.

Namely, the recognition that the wealthiest members of the Serbian society are (ab)using foreign

holding companies to channel and control their primarily Serbian investments and assets has for

some time become a part of the general discourse. E.g. it has become common knowledge that

Cypriot companies, as Cyprus has been one of the most favorite tax planning jurisdictions for

Serbian individuals, have some purpose in avoiding Serbian taxation. From approximately 2010

we have witnessed in Serbia a notable political campaign targeting those wealthy Serbian

nationals who are seen as not paying their fair share of taxes (in Serbian colloquial tongue they

are called tycoons). In the beginning, this campaign was not followed by any concrete actions

but was mostly media focused. However in 2012 a sale of shares in a notable Serbian company

for close to 1 billion EUR raised too many questions when it was realized that the assets, which

were commonly understood to be owned by the wealthiest Serbian individual at the time, were in

fact being sold by a Cypriot company wherein no tax was to be paid on the considerable capital

gain generated by this transaction (by virtue of the application of the 1985 Serbia/Cyprus double

taxation treaty57

). It would be justifiable to assume that such a case combined with significant

media attention and subsequent political pressure presented a perfect opportunity for the Serbian

tax authorities to attempt to challenge the residence of the Cypriot holding company and perhaps

assert its Serbian tax residence. Furthermore, the past dormancy of the Serbian tax authorities

with respect to cross-border tax avoidance raised the possibility that Serbian taxpayers would not

be particularly careful when implementing their tax planning schemes. In other words, some

callousness could have been expected from Serbian taxpayers thus raising the chances of

successful challenges by the Serbian tax authorities. Surprisingly, a Solomon solution was

reached and the Cypriot holding company contributed the shares in question into a Serbian

special purpose vehicle (SPV), i.e. a company specifically established in Serbia for the purpose

of conducting the sale of shares through it. Finally the shares were sold by the Serbian SPV and

57

Official Gazette of the Socialist Federal Republic of Yugoslavia – International Agreements, no. 2/1986.

16

the capital gain generated by the sale was subject to tax in Serbia.58

A notable opportunity was

lost and so far we have not seen any new developments in the story of the “place of real

management and control” residence criterion in Serbia.

Although Serbian academics were pointing out that the problem of tax avoidance/evasion by

Serbian individuals through the use of foreign conduit companies could, in the absence of CFC

rules, be dealt with, at least in the beginning of the process, by first applying the Serbian

statutory provisions on tax residence (the criterion of “place/seat of real management and

control”),59

their voice was either not heard by or was not loud enough for Serbian tax authorities

or tax policy makers. Furthermore, academic debate did notice that the situation of legislation

which is not applied or enforced leads to legal uncertainty and that it contains corruption

potential. Again, this aspect was not (yet) taken into consideration. Sadly, due to the ever more

depleting administrative capacities caused by the austerity regime, the Serbian tax legislator is

more and more relaying on broadening the scope of withholding taxation instead of attempting to

implement existing solutions.

Some Serbian taxpayers were quick to realize the magnitude of the problems they may face if the

tax residence of their foreign conduit companies was challenged and, based on the general

impression of their actions, they are taking care to follow comparative tax planning strategies to

shield from such risks.

2.4.Personal position

A personal position with respect to the rules on tax residence of a Serbian author is bound to be a

bit schizophrenic. The experience from the last quarter of a century shows that Serbia does not

possess the sufficient administrative capacity for the effective implementation and control of

residence criterion which require in depth analysis of the facts and circumstances the taxpayers is

in. Thus, the primary position with respect to the Serbian situation is that the rules themselves

are perhaps of secondary relevance and that it is much more important to work on establishing

58

http://www.rtv.rs/sr_lat/ekonomija/delta-uplatila-porez-za-maxi_305868.html. 59

D. Popović, S. Kostić, op. cit.

17

institutions which can apply the rules, whatever the legislator in his wisdom decides to introduce.

At this point, facing the rampant problem of tax avoidance and evasion by Serbian resident

individuals, through the use of foreign conduit companies and taking into account the evident

inability of the Serbian tax authorities to deal with this issue, it may be advisable to introduce a

provision deeming all those non-resident (foreign) companies directly or indirectly owned by

Serbian residents as having their places of real management and control in Serbia, unless they

can prove to the satisfaction of the Minister of Finance that they have substantial business

activities in the country of incorporation. Going after the residence of the companies instead of

introducing CFC rules would serve three purposes:

It would bring Serbian tax authorities into direct conflict with the tax authorities of some

of its double taxation treaty partners. There is a perception in Serbia (shared by this

author) that our tax authorities are too lenient in accepting the positions of their foreign

peers. In the opinion of this author, in a world which is full of jurisdictions that have

tailored their domestic legislations to ease activities which harm the badly needed

revenues of other nations, those who are in jeopardy should be prepared to be

antagonistic to those who are in essence aiding and abetting tax avoidance and tax

evasion.

It would impose all tax obligations, procedural as well as material, on foreign companies

deemed as Serbian tax residents, with procedural (mainly reporting) ones crucial for

obtaining information relevant for combating tax evasion and avoidance at the level of

the shareholders.

CFC rules are usually quite sophisticated and require tailored mechanisms to ensure the

avoidance of taxing the same income twice. Serbia does not have the administrative

capacity for overly sophisticated solutions.

However if one steps out of the Serbian onto the global scene, and reads out loud the definitions

of some of the basic pillars of international tax law, such as the concept of residence or the PE,

one cannot resist the impression that before him is a world of huge blast furnaces, steel mills and

18

coal, sirens leading to thousands of workers going through huge factory courtyards,60

elegant

board rooms with majestic paintings on the mahogany covered walls. If one excuses this overly

theatric escapade, it is reasonable to raise the dilemma are the concepts invented in a completely

different world still appropriate in an environment which takes for granted that which was only a

few decades ago considered as science fiction? Allowing for the accusation of being too

skeptical, we may end with a further cause of concern that in addition to questioning the

concepts, should we perhaps amend the procedures through which new ones will be designed.

Namely, the concept of residence and its definition were invented in a world where fathers were

able to comprehend their sons. Today, toddlers use iPads with ease, while their grandparents or

even parents find writing a text message on their mobile telephone stressful. Thus, in redefining

the elements of international tax law perhaps we should invite to the process those who may not

know law or business, but are able to comprehend and prophesize on the ways in which our

world is going to change by virtue of technological advancements.

60

The host city of the EATLP conference for which this report is prepared, Lodz, has one of the perfect examples of

such a courtyard, although the factory has been turned into a shopping mall appropriately named Manufaktura.