Serbia–Estonia Double Taxation Agreement (DTA) on Income Taxes

An Agreement for the Avoidance of Double Taxation (hereinafter: the DTA) is a bilateral international treaty by which two states allocate taxing rights in order to eliminate double taxation of the same income, using typical mechanisms such as the credit/exemption method, rules on permanent establishment, non-discrimination, and the mutual agreement procedure. Such treaties are predominantly (but not exclusively) drafted in accordance with the OECD Model. This text forms part of our series of articles in the field of Serbian tax law, which will deal specifically with the Serbia–Estonia tax treaty, while in a separate, stand-alone article we will address, in general terms, the subject matter and mechanisms contained in this type of international treaty, as well as their logic and practical consequences for non-residents and residents.

The Serbia–Estonia DTA was signed in New York on 25 September 2009, after which it was ratified and entered into force in both countries. Under the domestic corporate income tax regime, the tax rate is proportional and uniform - 15% (Article 39 of the Law on Corporate Income Tax). Taxpayers are resident legal entities (taxed on profits earned in the territory of the Republic of Serbia and outside it) and non-resident legal entities, but only in respect of profits earned through business carried on via a permanent establishment in the Republic of Serbia. The tax base is the taxable profit determined in the tax balance sheet by adjusting the profit shown in the income statement, prepared in accordance with IAS/IFRS (including IFRS for SMEs) and accounting regulations, in the manner prescribed by law. Income of non-residents earned without a permanent establishment (e.g., dividends, interest, royalties and related rights fees, etc.) is subject to withholding tax.

When a resident legal entity pays income to a non-resident, as a rule, withholding tax of 20% is calculated and paid on: dividends and profit shares, royalties and related fees and industrial property rights, interest, lease and sublease of real estate and movable property in the territory of the Republic of Serbia, as well as on market research services, accounting and audit services, and other legal and business consulting services (regardless of where they are provided or used). The obligation to file the return and make the payment is tied to a deadline of three days from the payment of the income. Application of a double taxation avoidance agreement is possible upon presentation of a certificate of residence and subject to the condition that the recipient is the beneficial owner of the income. However, if the documentation does not exist at the time of payment, the law applies, and any excess tax paid is treated as overpaid tax after subsequent proof is provided. In practice, the rule is also important that withholding corporate income tax is not calculated when income is paid to the permanent establishment of a non-resident in Serbia (except under a special regime for permanent establishments from preferential jurisdictions). Capital gains of non-residents realized in the territory of the Republic of Serbia are taxed by assessment at a rate of 20%, unless an international treaty provides otherwise.

For the sake of simplification, in this text we deliberately do not address the special rules applicable to payments to non-residents from so-called preferential jurisdictions (including mandatory withholding tax and the specific treatment of income of permanent establishments), bearing in mind that this issue requires a separate analysis depending on the specific transaction and the applicable list of jurisdictions.

The agreement between Serbia and Estonia for the avoidance of double taxation with respect to taxes on income establishes a clear and predictable framework for allocating taxing rights between the two states. Its aim is to eliminate double taxation, prevent tax discrimination, and enable efficient exchange of information, thereby encouraging investment and economic cooperation.

The treaty applies to persons who are residents of one or both Contracting States. It covers taxes on income irrespective of the method of collection. In the Serbian system, these are corporate income tax and personal income tax. In Estonia, income tax is covered. The treaty also applies to identical or substantially similar taxes introduced after signature, with the competent authorities mutually notifying each other of changes in legislation.

Dividends paid by a company resident in one state to a resident of the other state may be taxed in the state of residence of the recipient. The source state (Serbia) retains the right to tax at limited rates: a maximum of 5% of the gross amount of the dividend where the beneficial owner of the dividend is a company that directly holds at least 25% of the capital of the payer; in all other cases, a maximum of 10%. The limitation of the rate (5%/10%) does not apply where the shares/participations are effectively connected with a Serbian permanent establishment or a fixed base of the Estonian recipient - in that case, the rules on business profits (Article 7) apply, i.e., the income is included in the taxable profit of that permanent establishment and taxed under the Serbian corporate income tax regime. Illustratively: if an Estonian company carries on business in Serbia through a registered permanent establishment, and it is precisely that establishment that acquires and manages the participation in a Serbian subsidiary, the dividend is attributable to that permanent establishment and taxed through its tax balance sheet (there is no treaty “cap” of 5% on withholding tax). As regards the conditions for the 5% rate, it is materially required that the Estonian recipient be a tax resident of Estonia and the beneficial owner of the dividend and that it directly holds at least 25% of the capital of the Serbian payer; formally, the Serbian payer must, prior to payment, have available a valid certificate of residence for the year of payment and evidence/declaration of beneficial ownership, as well as evidence of a direct participation of ≥25%. The treaty does not prescribe a minimum holding period for the application of the 5% rate. If the conditions for 5% are not met, the “fallback” is 10% where treaty relief is available and the recipient is the beneficial owner but does not meet the 25% threshold; if, however, treaty application is not possible at the time of payment (e.g., no certificate of residence is available or the dividend is attributable to a Serbian permanent establishment), the domestic general withholding tax rate of 20% applies, with the possibility of a subsequent refund/reduction to 10% or 5% after the documentation is submitted. In practice, the refund is initiated by the non-resident recipient or by the Serbian payer on behalf of the recipient by submitting a request to the Tax Administration, with the following attachments: a certificate of residence covering the relevant period, proof of payment and of the calculated/paid withholding tax, proof of the ownership participation, and a statement/evidence of beneficial ownership status. The procedure is conducted under the general rules of tax procedure within the statutory deadlines. The source state may not tax undistributed profits nor dividends paid to non-residents outside the conditions of the exception.

In addition to the issue of dividends, the Serbia–Estonia treaty also covers: interest with a treaty limit of 10% and exceptions for state/central-bank creditors; royalties with limits of 5% or 10% depending on the type of right, with the Protocol confirming the distinction that payments for software implementation and distributor fees for the right to distribute copies (without reproduction rights) are not royalties; capital gains, including taxation of the alienation of shares deriving >50% of their value from immovable property in the other state; rules on permanent establishment (including construction works exceeding 12 months); independent personal services, employment and the 183-day exemption from taxation; directors’ fees; artistes and sportsmen; pensions and government service; students, professors and researchers; other income; mechanisms for the elimination of double taxation (credit/exemption by the state of residence), equal treatment (non-discrimination), the mutual agreement procedure (MAP) and exchange of information. The Protocol also contains a “most-favoured-nation clause” for withholding tax rates: if Serbia subsequently agrees lower rates with an OECD member state, the competent authorities of Serbia and Estonia shall meet for the purpose of reducing the rates under Articles 10, 11 and 12 of this treaty.

The Serbia–Estonia treaty contains a balanced and modern set of rules based on the OECD Model. In practice, it ensures controlled and transparent withholding tax rates, clear thresholds for the creation of a permanent establishment, and effective mechanisms for eliminating double taxation. The Protocol provides flexibility for the rates to be adjusted to the most favourable terms that Serbia offers to OECD member states, and the exchange-of-information provisions place emphasis on compliance and integrity. For investors and businesses, this means planning certainty, and for tax authorities, predictability and cooperation. Our recommendation is that every cross-border payment or structure should be “mapped” in advance against the relevant treaty provisions, supported by proper documentation on tax residence, beneficial ownership, and the economic substance of the transaction.