Investing in real estate – tax aspects

26. July 2018 | Reading Time: 3 Min

Investing in real estate in Serbia has become increasingly popular over the past few years. If you are acquiring existing real estate, particularly rental property, to own and profit from over a long period of time, you should be aware of the most appropriate structure to acquire and hold your investment.

Share vs. asset deals

First of all, there is a huge difference between share deal and asset deal, and in every specific case a number of circumstances should be considered to decide what type of the transaction is more appealing.

With regards to asset deals, there are some basic rules which investors have to consider when investing in real estate in Serbia:

VAT is due on the following transfers of real estate:

  1. First transfer of ownership over the real estate; and
  2. Other transfers (i.e. second and any other subsequent one) of ownership, if the following conditions are met:
  • Seller and buyer are registered for VAT at the moment of transfer;
  • Contract on sale of real estate sets out that the parties agree on VAT being charged; and
  • Buyer is entitled to fully deduct calculated VAT.

Only if all three conditions are (cumulatively) met, VAT can be opted for on the sale of real estate. Otherwise, transfer is subject to 2.5% transfer tax.

Statutory payer of the transfer tax is seller. However, buyer and seller commonly agree that buyer will pay the transfer tax. Transfer tax base is a contracting price if it is not below the market price of an asset valid at the time of the sale. Whether an asset is traded below the market price is determined by the Tax Authorities in its assessment.

Capital gain tax

Transfers of real estate are normally liable to capital gains tax at the rate of 15%, both for companies and individuals, so this aspect also needs to be considered by a property owner.

Financing investment, transfer pricing and withholding tax

While there are numerous structures by which investors may acquire real estate in Serbia, the use of intercompany debt is ubiquitous in these ventures. In a typical structure, the foreign parent lends money to its Serbian subsidiary, which in turn makes periodic principal and interest payments to the foreign parent.

In case of intercompany loans, Serbian subsidiary performs the adjustment of interest expenses in two levels: the first level is thin-cap test (thin cap exists if debt/equity ratio exceeds 4:1) and the second level is transfer pricing test.

For the transfer pricing test, interest rates are in most cases compared to the interest rates set out by the Ministry of Finance which are considered to be at „arm’s length“. However, a taxpayer may choose to apply general rules for determining „arm’s length“ prices which assumes performing benchmark analysis by using appropriate database.

Interest is subject to standard tax rates at payee level and are generally deductible for the payer. Cross-border payment of interest is subject to 20% withholding tax (or 25% if payments are made to jurisdictions identified as tax havens by the Ministry of Finance), unless a DTT provides otherwise and a tax residence certificate is provided.

It is essential to take tax advice before any plans are finalised and certainly before any monies change hands.

If you would like to discuss the above blog in more detail, or you would like to speak with a member of our team, please send an email to office@tpa-group.rs or call a member of our tax team at +381 11 655 88 00.

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