According to the new bylaw on interest rates considered to be adhering to the “arm’s length” principle (published in the Official Gazette RS 17/2014), new interest rates have been prescribed with regards to related party financing transactions. These rates will be used to calculate interest income and interest expense arising from loans provided to/from related parties.
The proposed rates are applicable to loans in RSD and loans indexed in foreign currencies such as EUR, USD and CHF.
In order to determine the appropriate interest rate that should be charged on loans between related parties, taxpayers may choose one of the following options:
A) Use the general regulations regarding transfer pricing with one of the methods used to calculate interest rate or
B) Use the interest rates prescribed by the Ministry of Finance.
The method chosen by the taxpayer should be applied consistently to all loans provided to/from related parties.
The interest rates prescribed by the Ministry of Finance and considered to be at “arm’s length” are as follows:
a.3.30% on EUR loans and RSD loans indexed in EUR
b.2.88% on USD loans and RSD loans indexed in USD
c.2.21% on CHF loans and RSD loans indexed in CHF
2.For other taxpayers
a.17.11% on short term loans in RSD
b.14.73% on long term loans in RSD
c.7.88% on short term loans in EUR and RSD loans indexed in EUR
d.6.55% on long term loans in EUR and RSD loans indexed in EUR
e.9.25% on short term loans in CHF and RSD loans indexed in CHF
f.6.30% on long term loans in CHF and RSD loans indexed in CHF
g.7.57% on short term loans in USD and RSD loans indexed in USD
h.5.56% on long term loans in USD and RSD loans indexed in USD
If the use of the loan agreement-defined interest rate for one transaction with a related party is chosen, the taxpayer has to use the same method for all transactions. By the same token, if a taxpayer chooses to use the “arm’s length” interest rate, then that approach has to be used for all transactions.
Despite the aggressive approach of the Serbian tax authorities with regards to related party financing transactions, non-resident group companies may still opt to grant loans instead of equity contributions to their Serbian subsidiaries in order to take advantage of the beneficial provisions of Double tax agreements between Serbia and the relevant States. For example, according to the Double Tax Treaties concluded between Serbia and Germany, France, Norway, the Netherlands, Finland and Sweden a 0% withholding tax rate is imposed on interest payments abroad whereas a withholding tax rate ranging from 5% to 15% may be suffered on dividend payments.
In addition, according to the Serbian thin capitalization rules, interest expense and other related expenses are allowed as deductible provided that the loans obtained from related parties do not exceed four times the net equity of the company (ten times for banks and leasing companies).