On 18 January 2023, the Ministry of Finance of the Republic of Serbia issued opinion no. 011-00-940/2022-04, which refers to taxation of income earned by a natural person – foreign national and tax resident of the Republic of Serbia from a foreign legal entity on the basis of work in the territory of Serbia (“the Opinion”).

Content of the Opinion

According to the Opinion, the income earned by a natural person – foreign national and tax resident of the Republic of Serbia from a foreign legal entity on the basis of work in the territory of Serbia, under the employment contract concluded with such legal entity as the employer (non-resident legal entity that does not have a registered branch, representative office or affiliated entity in the Republic of Serbia) in accordance with the regulations of the foreign country of residence of such legal entity, shall be subject to taxation as other revenue, on which basis relevant contributions for mandatory social insurance are calculated and paid.

Under the provision of Article 7, paragraph 2 of the Law on Personal Income Tax, a resident of the Republic of Serbia, by virtue of this law, shall mean a natural person:

• whose residence or centre of business and vital interests is in the territory of Serbia; or
• who resides in the territory of Serbia, continuously or with intermissions, for 183 or more days over a period of 12 months, starting or ending in the respective tax year.

Rationale of the Opinion

Namely, provisions of Article 85, paragraph 1, item 1) and 16) of the Law on Personal Income Tax stipulate that other revenue, by virtue of this law, shall include other revenues that, by their nature, comprise the income of a natural person, particularly the revenues on basis of service contract, and all other revenues that are not taxed on other grounds or are not excluded from taxation or exempt from tax under this law. According to the provision of Article 100a, paragraph 2 of this Law, the taxpayer who earns income and other revenues in or from other country, at a diplomatic or consular mission of a foreign country and/or international organisation, or at representatives and employees of such mission and/or organisation, shall be obliged to calculate and pay withholding tax by way of self-taxation under this law, given that the tax is not calculated and paid by the payer of revenue.

In addition, according to the provision of Article 6, paragraph 1, item 17) of the Law on Contributions for Mandatory Social Insurance, a person who collects the contractual remuneration is a natural person who performs tasks based on service contract, copyright contract, additional work contract and other contract or any other basis, and for performed tasks collects the contractual remuneration, i.e., fee. The contractual fee implies the fee that holds taxes and contributions paid on the account of the person who collects that fee, in accordance with item 18) of the same article of the law. Under the provision of Article 28 of the law, contributions base for the persons who collect a contractual fee is a taxable income of the contractual fee in accordance with the Law on Personal Income Tax. Nevertheless, according to the provision of Article 57, paragraph 2 of this law, a person who collects the contractual fee shall be obliged to calculate and pay contributions in cases when such compensation is collected from a person who is not obliged to calculate and pay contribution upon payment.

Provision of Article 12, paragraph 1, item 3a) of the Law on Pension and Disability Insurance prescribes that self-employed insured persons shall mean persons working on the territory of the Republic of Serbia for a foreign employer that does not have a registered representative office in the Republic of Serbia, where they earn fee (contractual remuneration) for their work and they are not insured on other grounds.

Considering the abovementioned legal provisions, the Opinion states that the income earned by a natural person – foreign citizen and tax resident of the Republic of Serbia from a foreign legal entity on the basis of work in the territory of Serbia, under the employment contract concluded with such foreign legal entity as employer (non-resident legal entity that does not have a registered branch, representative office or affiliated entity in the Republic of Serbia) in accordance with the regulations of the foreign country of residence of such legal entity, shall enjoy a tax treatment of other revenue in accordance with Article 85 of the Law on Personal Income Tax. On the same grounds, relevant contributions for mandatory social insurance shall also be calculated and paid, namely contribution for pension and disability insurance and contribution for health insurance (as the person is not insured on other grounds). Based on the revenue earned by a natural person from a foreign legal entity (employer from a foreign country that is not subject to calculation and payment of withholding tax), taxes and relevant contributions for mandatory social insurance shall be calculated and paid by self-taxation, in accordance with provisions of Article 100a and Article 57, paragraph 2 of the Law on Contributions for Mandatory Social Insurance.

In addition, it is indicated in the Opinion that Article 12, paragraph 1 of the Law on Personal Income Tax stipulates that, if a taxpayer who is resident of the Republic of Serbia earns revenue in some other country, on which tax was paid in such country, he/she shall be allowed a tax credit amounting to the income tax paid in the other country, on the individual income tax levied in conformity with the present law. In accordance with paragraph 2 of the same Article of the law, the tax credit may not exceed the amount that would be obtained by applying the provisions of this law to the income earned in another country.

In relation thereto and given that the essence of (tax) credit method lies in the fact that the Republic of Serbia, as residence country (upon income tax calculation), grants the application of tax credit for the amount of personal income tax paid by natural persons (residents of the Republic of Serbia) in another country, the Opinion reads that the amount of tax credit may be obtained for income tax that is subject to personal income taxation. Therefore, a taxpayer shall be entitled to a tax credit, but it shall be limited by the amount of the applicable part of Serbian tax on such revenue, i.e., it may not exceed the amount that would be obtained by application of the provisions of the Law on Personal Income Tax on revenue earned in another country. For application of this credit method, it is necessary to provide to the competent tax authorities in the Republic of Serbia relevant evidence (issued by the competent authority of another state) that the revenue concerned was indeed taxed in this other country.

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