We present an overview of tax incentives for innovative companies, which, in addition to IT companies, encourage the opening and development of companies that mainly deal with innovations.
In recent years, the Republic of Serbia has influenced the opening and development of innovative companies through numerous tax incentives for companies through changes in tax laws. Certain changes, such as the taxation of freelancers, met with great resistance, but not a few of them were welcomed with enthusiasm.
Such trends in legislation have influenced Serbia to become attractive for foreign investors who want to decide to open a company in Serbia, foreigners as employees and especially for certain activities such as IT services.
What is meant by innovative activity?
Innovations represent a concept – a method of action by which new products or processes are created. Innovative activity is the creation of new as well as the improvement of existing products, processes and services within the existing technical and technological basis and all in accordance with the needs of the market. One of the important features of companies that engage in innovation is that their investment in research and development constitutes a minimum of 15% of total business expenses and that they employ mostly highly educated staff.
Participants of the innovation system, scientific and technological organizations and the subsidy system
Innovation activity, in order to achieve the goals of the innovation policy, is financed both by the Republic of Serbia and by the Autonomous Province and local self-government units. The register of innovative activities is maintained by the Ministry of Science and Technological Development. A legal entity can be registered in this Register if it has its seat on the territory of the Republic of Serbia and, at the time of establishment, was registered for one of the activities in the field of research and experimental work in natural sciences and technological development, provided for in the Decree on the Classification of Activities, with the possibility of, of course, as and other legal entities, performs other activities.
What is an innovative startup?
All companies that perform innovative activities and do so as their main activity are innovative startups. This actually means that when registering a company, activities focused on the creation of new products, processes, technologies and services or significant changes to existing ones should be registered. The center of business must be in the territory of the Republic of Serbia, which actually means that all research activities must be undertaken in the Republic of Serbia as an innovation development activity itself. A company in the sense of an innovative startup means that no more than 3 years have passed since the establishment of the company, that the establishment itself is not a consequence of the status change of another company.
Innovative activity as the predominant activity
Innovative activity as a predominant activity requires the following criteria to be met:
- according to the latest financial reports, the annual income is not allowed to exceed 500.000.000 dinars,
- from the establishment and in the following three years, distribution of dividends is not allowed
- funds invested in research and development are at least 15% of total expenses, while on the other hand, more than 80% of all employees are highly qualified staff or the company is the owner or beneficiary of a deposited copyright or patent that is directly related to the innovation activity it performs.
What are the tax breaks for innovative IT startups?
1. Exemption from paying taxes and social security contributions on the earnings of the founder who is employed in that company
This applies to all newly founded companies engaged in innovative activities in accordance with the Law on Personal Income Tax and the Law on Contributions for Mandatory Social Insurance. Innovative companies in Serbia are mostly from the domain of the IT industry, and we wrote a text about how to open IT companies in Serbia.
Taxes and contributions are not paid on the basis of the founder’s salary, which was paid within a period of 3 years from the day of establishment, and for salaries whose gross amount does not exceed 150.000 dinars. The right to exemption is exercised by an innovative startup on the condition that its founder has at least 5% of shares or shares and that, in accordance with the Labor Law, he has established an employment relationship and is registered for mandatory social insurance.
Despite the fact that the provisions are quite encouraging, there are certain limitations that should be taken into account when establishing a company. It is not often the case that individuals work simultaneously on several projects and are founders of several startups at the same time. In this case, the Law provides that this benefit cannot be used cumulatively for several companies.
This actually means that the right to relief can only be exercised in one startup.
Another limitation refers to the impossibility of combining a number of different benefits. So, let’s say, if an innovative startup opts for the founder’s earnings and opts for exemption from taxes and social security contributions, in that case it is not entitled to other incentives based on the employment of that person.
2. Tax credit of 30% for investments in startups
A company that invests in the capital of a newly founded company that performs innovative activities is granted the right to a tax credit in the amount of 30% of the investment made, up to a maximum of 50.000.000 dinars in one tax year, which actually means that it can reduce its tax liability by 30%. On the other hand, the highest amount of tax credit that can be obtained by a taxpayer who makes an investment is 100.000.000 dinars.
3. Tax relief “IP Box”
Profit tax based on qualified income from deposited intellectual property, which is mainly created in the Republic of Serbia, can be reduced to only 3% instead of 15% as usual.
This benefit mainly applies to patents, software, applications as well as all other similar types of income from forms of intellectual property as mentioned above.
The deposit can also be made electronically, with a reduced fee at the Intellectual Property Office. What is important is that the Institute does not open the said work, but only keeps it for the purposes of eventual proof of intellectual property rights. If the work (e.g. application or software) is changed several times during the year, it is considered that one deposit by the deadline for submitting the tax return includes all changes made during that calendar year.
4. Reduction of the tax and contribution base by 70% for foreigners and returnees
The mentioned relief applies to newly settled persons who establish an employment relationship with a domestic employer. We wrote about this reduction – Tax relief for returnees and foreigners. The condition for using this measure is that:
- in the previous two years, the person did not mainly reside in the territory of the Republic of Serbia
- for returnees and foreigners, regardless of age – to have a contracted monthly gross salary of more than 344.082 dinars,
- for young returnees – that the contracted monthly gross salary is greater than 229.388 dinars,
- for young returnees, to be less than 40 years old on the date of conclusion of the contract.
The reduction is realized for a period of 5 years and for all jobs where special professional education is required. In order for the conditions for obtaining this tax relief to be applicable, it is necessary that the “young returnee” establishes an employment relationship in a workplace for which there is a need for the employee to have a special professional education and for which there is a need that cannot be easily satisfied on the domestic labor market. An additional condition is that the employed person resides in the territory of the Republic of Serbia at the same time as the employment relationship is established, and can be considered its “tax resident”.
5. Exemption from paying part of taxes and contributions for PIO based on the wages of newly employed qualified workers
This measure primarily applies to persons who were previously unemployed or employed as flat-rate workers. The measure is applied for a period of 3 years:
- in 2023, the employer is exempted from paying 50 percent of taxes and 70 percent of PIO contributions
- in 2024, 40 percent of taxes and 65 percent of pension contributions are exempted,
- and in 2025, 30 percent of taxes and 55 percent of contributions for PIO.
6. Recognition of expenses for research and development in the tax balance in twice the amount
The Law on Profits of Legal Entities stipulates that in the taxpayer’s tax balance, double increased expenses of the taxpayer, which are directly related to research aimed at acquiring new scientific or technical knowledge and development carried out by the taxpayer in the Republic of Serbia, can be recognized as expenses. The recognition itself is not conditional on the success of the project, but aims to encourage creativity and innovation.
This cost category refers to:
- salary costs of employees who work directly on research and development,
- costs of acquiring intangible assets (eg licenses for the necessary software),
- costs of advisory services from business entities that are not related parties to the taxpayer,
- costs related to the protection of intellectual property, etc.
In addition to the above, a significant novelty is that marketing costs are recognized in full, which is an exceptional advantage for companies where significant funds are allocated for advertising purposes. Previously, it was the case that they could only be recognized up to the level of 10% of the taxpayer’s income.
7. “Partnership for innovation” model in public procurement
In the Law on Public Procurement, the term “Innovation Partnership” was introduced, all with the aim of encouraging the development of innovative goods and services or their subsequent procurement. This model can be used in the event that the customer needs innovative goods, services or works and cannot provide them on the market. The criterion for awarding the contract for this model is the best price-quality ratio.
8. “Regulatory sandbox” for innovative payment solutions
Startups have the opportunity to apply for the use of innovative payment solutions within the so-called “Exemption of a limited network under controlled conditions” provided for by the Law on Payment Services. This implies that it is not necessary to obtain permission from the National Bank of Serbia for the provision of payment services, but it is necessary to provide the National Bank of Serbia with insight into the testing of the given solution. The mentioned measure allows to “skip” the entire procedure of submission and compliance with the regulation in the initial phase when the success and cost-effectiveness of the solution cannot be fully assessed. This results in significant cost savings and, on the other hand, enables testing of the innovation itself.
9. Accelerating the import of prototypes and components for the development and production of innovative products
At the end of 2018, amendments to the Rulebook on the import of unregistered medical devices were adopted, reducing the import of all goods intended for research and development to 24 hours. This right is given to companies that are members of Science and Technology Parks, beneficiaries of the Innovation Activity Fund and other scientific and research organizations.
How does the application of tax reliefs work when exempting from payment of contributions in practice?
Two essential questions that arise when using these measures are whether and how to apply for their use and whether the Tax Administration requires a special registration. What the regulations on the application of tax reliefs foresee is self-assessment.
This actually means that companies themselves decide whether to apply them or not. Control of the fulfillment of the conditions for application can only be carried out subsequently by the Tax Administration.
The most problematic inconsistency in practice is the obligation to conclude an employment contract for an indefinite period of time with the newly settled taxpayer, which is contrary to the regulations governing the residence and employment of foreigners in the Republic of Serbia. It is not known what period that is. what number of months can the Tax Administration consider as the predominant residence. In any case, a certain period of time before the employment contract is concluded, the foreigner must reside in the territory of the Republic of Serbia, since he must apply for a temporary residence and work permit and wait for the decisions of the competent authorities. According to the opinion of the profession, this period should not be included in the “predominant stay”.
If you need the support of the accounting agency HLB TM DOO and tax consultants in better understanding all the possibilities for using tax reliefs for your company, contact our team and we will support you with the most optimal tax solutions.
