EATLP Congress Corporate Tax Residence and Mobility. Serbia

Transcription

1 Doc. Dr Svetislav V. Kostić University of Belgrade Faculty of Law EATLP Congress 2017 Corporate Tax Residence and Mobility Serbia 1. (Tax) residence in the domestic concept 1.1. Civil law, corporate law and other non-tax areas Under Serbian corporate legislation companies acquire the status of a legal entity by virtue of registration in the Business Entities Register, 1 while the seat (sedište) of a company is defined as the place in the territory of Serbia from which the business of a company is managed and which is as such designated in the founding acts of a company or by virtue of the decisions of the company s general meeting. 2 Thus, it can be concluded that companies whose seat is in Serbia can be granted the status of a legal entity under Serbian corporate legislation. Such a conclusion was questionable under Serbian corporate legislation in force prior to the enactment of the 2011 Corporations Act, 3 as in it we find a more elusive definition of the company s seat: (1) The seat of a company is the place from which it s business is managed. (2) The seat of a company is designated in the founding acts of the company and is registered in accordance with the legislation governing the registration of companies. 4 1 Art. 3 of the Corporations Act [Zakon o privrednim društvima], Official Gazette of the Republic of Serbia, no. 36/2011, 99/2011, 83/2014, 5/2015 (hereinafter : 2011 Corporations Act). 2 Art. 19 of the 2011 Corporations Act. 3 Corporations Act [Zakon o privrednim društvima], Official Gazette of the Republic of Serbia, no. 125/04 (hereinafter: 2004 Corporations Act) and Enterprises Act (Zakon o preduzećima), Official Gazette of the Republic of Serbia, no. 29/1996, 33/1996, 29/1997, 59/1998, 74/1999, 9/01, 36/ Art. 16 of the 2004 Corporations Act. 1

2 Namely, prior to the introduction of the 2011 Corporations Act Serbian corporate legislation does not contain any reference as to the issue does the seat of a company needs to be in Serbia in order for it to be allowed to be incorporated registered in Serbia. Although we have not yet seen examples of companies whose seat is outside of Serbia attempting to incorporate under Serbian legislation (which makes the above stated issue purely theoretical), a more practical dilemma we are faced with is whether Serbia adopts the incorporation criterion or the real seat criterion for determining the lex societatis of a company. While dominant Serbian academic literature will state that Serbian corporate legislation adopts the real seat criterion, as it defines the seat of a company as the place from which the business of the company is managed, 5 such a conclusion is disputed to a point by some sources. 6 What should be taken into consideration is that there is an obligation to register the (real) seat of the company, while the Business Entities Register will not, in the process of registration, scrutinize if the submitted address of the seat of the company is in fact the place from which the business of the company is managed. Once the company is registered, third parties who rely on the contents of the Business Entities Register cannot suffer damages from incorrectly registered information. 7 Therefore, the real seat criterion is for practical purposes transformed into the incorporation criterion. 8 Serbian international private law stipulates that the nationality of a legal entity is determined under the law of the state under whose legislation it has been incorporated. If, however, a legal entity has its real seat (stvarno sedište) in a state other than the one in which it has been incorporated, and is treated as a national of that other state under its legislation, the legal entity will be deemed as a national of the state of its real seat. 9 Older Serbian international private law academic literature infers that in principle a real seat of a company may be either in the state 5 M. Vasiljević, Kompanijsko pravo IX dopunjeno i izmenjeno izdanje, Udruženje pravnika u privredi Srbije, Beograd 2015, p T. Jevremović-Petrović, Državna pripadnost, Lex societatis i sedište privrednog društva, Pravni život, no. 11/2010, p Art. 6(1) of the 2011 Corporations Act. 8 T. Jevremović-Petrović, op.cit., p Art. 17 of the Law on Resolving the Conflict of Laws with Other States [Zakon o sprečavanju sukoba zakona sa propisima drugih zemalja], Official Gazette of the Socialist Federal Republic of Yugoslavia, no. 43/1982, 72/1982, Official Gazette of the Federal Republic of Yugoslavia, no. 46/96 and Official Gazette of the Republic of Serbia, no. 46/

3 where its principal place of management is situated or where its principle business activity is performed. 10 On the other hand, Serbian jurisprudence sheds no light on the issue of interpretation of the concept of real seat in Serbian international private law i.e. it does not answer the question should it be understood as the place from which the business of the company is managed (i.e. under the seat definition provided in Serbian corporate legislation). So far we have not seen cases wherein the nationality, within the meaning of Serbian international private law, or incorporation as such, by virtue of the real seat being outside of Serbia, of a company has been challenged before Serbian courts or administrative bodies (e.g. Business Entities Register). An area where these issues may become relevant in the future could be found in the application of Serbian bilateral investment treaties (BITs). Namely, Art. 3(b) of the Serbian Model BIT 11 defines the investor as a legal entity incorporated, constituted or otherwise duly organized in accordance with the laws and regulations of one Contracting Party, having its headquarters in the territory of that Contracting Party and making investments in the territory of the other Contracting Party. A number of Serbian BITs contain an identical or similar definition of an investor, requiring a legal entity to be both incorporated in a contracting state and to have its seat/headquarters in that state in order for it to be allowed to claim BIT benefits. 12 As BITs as a rule do not contain an autonomous definition of the concepts seat and headquarters, we would have to revert to domestic legislation in order to understand these concepts. Therefore it would be relatively easy to imagine a hypothetical situation wherein the Serbian authorities would attempt to deny the granting of BIT benefits to a company on the basis of it not having its (real) seat in the contracting state under whose law it has been incorporated. However, we have no actual examples of such cases in Serbia so far. 10 M. Dika, G. Knežević, S. Stojanović, Komentar Zakona o međunarodnom privatnom i procesnom pravu, Nomos, Beograd 1991, pp The text of the Serbian Model BIT can be found in English at: 12 E.g. Art. 1(1)(2)b of the 2001 Serbia/Austria BIT, Official Gazette of the Republic of the FRY International Agreements, no. 1/2002; Art. 1(1)(3) of the 1996 Serbia/Bulgaria BIT, Official Gazette of the Republic of the FRY International Agreements, no. 4/1996; Art. 1(1)(3)b of the 2005 Serbia/Cyprus BIT, Official Gazette of Serbia and Montenegro International Agreements, no. 14/2005; Art. 1(1)(2)b of the 2002 Serbia/Spain BIT, Official Gazette of the FRY International Agreements, no. 3/2004; Art. 1(1)(1)b of the 2001 Serbia/Turkey BIT, Official Gazette of the FRY International Agreements, no. 4/

4 An analysis of Serbian legislation shows a variety of approaches towards the issue of a company s nationality/residence. Serbian labor legislation will recognize domestic and foreign legal entities 13, although it will not provide us with guidelines when to deem a company as domestic or as foreign (thus implicitly reverting us to the provisions of international private law). The norms governing foreign trade, which also distinguish between domestic and foreign persons, contain the following definition: A domestic person, within the context of this Law, is a legal entity, a branch of a domestic or a foreign legal entity and an entrepreneur, who have their seat or who are registered in Serbia On the other hand, the Serbian Foreign Exchange Law 15 defines as resident those legal entities who are registered and who have their seat in Serbia. However, neither the Serbian Foreign Trade Law, nor the Foreign Exchange Law 16 provide any independent guidance on how to interpret the concept of seat which will be as a rule understood within the meaning given to it by Serbian corporate legislation. Finally, under Serbian bankruptcy statutes, which follow EU bankruptcy legislation, 17 exclusive competence for conducting bankruptcy proceedings (lex concursus) is given to Serbian courts in situations where the debtor s center of main interests (COMI) is in Serbia, while the COMI is defined as the place where the debtor conducts the administration of his interest on a regular basis and is as such recognized by third parties. In the absence of proof to the contrary the place of the registered seat is presumed to be the COMI of a company. 18 An overview of the Serbian approach to defining the nationality/residence of companies shows that the legislator has a tendency not to separately clarify certain concepts in particular laws and to rely on their definitions found in other legislation. The concept of seat is a good example of 13 Art. 2(1) and Art. 5(2) of the Serbian Labor Law [Zakon o radu], Official Gazette of the Republic of Serbia, no. 24/2005, 61/2005, 54/2009, 32/2013, 75/ Art. 3(1) of the Serbian Foreign Trade Law [Zakon o spoljnotrgovinskom poslovanju], Official Gazette of the Republic of Serbia, no. 36/2009, 36/2011, 88/2011, 89/2015). 15 Official Gazette of the Republic of Serbia, no. 62/2006, 31/2011, 119/2012, 139/ Zakon o deviznom poslovanju. 17 Council regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings, Official Journal L 160, 30/06/2000 P Art. 174a of the Serbian Bankruptcy Law [Zakon o stečaju], Official Gazette of the Republic of Serbia, no. 104/2009, 99/2011, 71/2012, 83/

5 such an approach, where it is somehow implied that it should be understood, for the purposes of applying various laws, within the meaning given to it by Serbian corporate legislation. Such a state of affairs may and does lead to notable legal problems, as concepts in different bodies of legislation may infer various meanings despite the same word being used to denote them Tax Law Similarly to most Central and East European countries, the transformation of the Serbian social, political and economic environment in the beginning of the 1990s lead to the introduction of new tax legislation tailored in accordance with standards found in comparative legislation of developed market economies. In Art. 2 of the 1991 Serbian Corporate Income Tax Law 19 we find the following provision: (1) The taxpayer from Art. 1 of this Law (hereinafter: taxpayer) is a resident of the Republic of Serbia who is liable to Corporate Income Tax on the profits generated in the territory of the Republic, in other republics 20 and in other countries. (2) A resident of the Republic is a taxpayer who is incorporated or has its seat of real management and control in the territory of the Republic. The principle that resident companies are subject to taxation on their worldwide income and the determination of residence of companies on the basis of two alternative criterion have remained a constant of Serbian tax legislation since their introduction in While in the last 26 years the provisions of the above cited Art.2(1) of the 1991 Serbian Corporate Income Tax Law suffered only amendments which reflected the changes in political scenery, those found in the second paragraph of Art. 2 of the same law were altered only once 19 [Zakon o porezu na dobit korporacija], Official Gazette of the Republic of Serbia, no. 76/ Serbia was at the time one of the six constituent republics of the Socialist Federal Republic of Yugoslavia, all of which are now independent countries (Bosnia & Herzegovina, Croatia, Macedonia, Montenegro, Serbia and Slovenia). 5

6 since their introduction. Namely, in the criterion seat of real management and control was transformed into place of real management and control. The reason which lead the Serbian legislator to replace the term seat with the term place in the definition of a resident for corporate income tax purposes was simple: the Serbian tax authorities have never applied the seat of real management and control criterion in order to assert that a company not incorporated in Serbia is a Serbian tax resident, 22 and the legislator probably assumed that this state of affairs may be due to an over formalistic approach by the Serbian tax authorities. In other words, the term seat had a formal aura, leading the tax authorities to follow the registered seat of a company, while the one that replaced it, place, allows for a more relaxed approach by the tax authorities. Unfortunately, such an assumption and the introduced solution did not deal with the core problems of Serbian tax legislation interpretation and application. If we take into account that the Serbian tax authorities have never applied the elusive criterion of center of business and vital interests for determining the residence of individuals 23, i.e. that they have never attempted to assert that an individual is a tax resident of Serbia purely on the basis of this criterion despite legal authority to do so, we may come to the conclusion that the Serbian tax authorities are unwilling and perhaps unprepared to apply residence criterion which require in-depth factual analysis. The inability or the unwillingness of the Serbian tax authorities to challenge the tax residence of foreign conduit companies, even when these are clearly controlled by Serbian residents, lead the Serbian legislator to find other solutions to combat cross-border tax evasion and in 2012 the first SAARs targeting tax havens were introduced. 24 These SAARs are focused on non-resident 21 Law on the Changes and Amendments to the Corporate Income Tax Law, Official Gazette of the Republic of Serbia, no. 119/ D. Popović, S. Kostić, (Zlo)upotreba stranih pravnih lica za izbegavanje poreza u Srbiji, Anali Pravnog Fakulteta, Vo. 58, no. 2/2010, p Art. 7(2)(1) of the Serbian Personal Income Tax Law [Zakon o porezu na dohodak građana], Official Gazette of the Republic of Serbia, no. 24/2001, 80/2002, 80/2002, 135/2004, 62/2006, 65/2006, 31/2009, 44/2009, 18/2010, 50/2011, 91/2011, 93/2012, 114/2012, 47/2013, 48/2013, 108/2013, 57/2014, 68/2014, 112/ Arts. 1, 18 and 39 of the Law on the Changes and Amendments to the Corporate Income Tax Law, Official Gazette of the Republic of Serbia, no. 119/

7 legal entities from jurisdictions with preferential tax systems and are dominantly inspired by the desire to stem tax avoidance of Serbian resident individuals. While the issue of what are jurisdictions with preferential tax systems was dealt by a broad definition and the granting of authority to the Serbian Minister of Finance to prepare and publish their list, non-resident legal entities from these jurisdictions are defined as: non-resident legal entities incorporated in a jurisdiction with a preferential tax system, or non-resident legal entities whose registered seat is in a jurisdiction with a preferential tax system, or non-resident legal entities whose place of management (seat) is in a jurisdiction with a preferential tax system, or non-resident legal entities whose place of effective management is in a jurisdiction with a preferential tax system. 25 The essential idea behind such a definition of a non-resident legal entity from a jurisdiction with a preferential tax system is to avoid dealing with the peculiarities of foreign tax legislations (e.g. the definition does not deal with the question of whether the non-resident legal entity is in fact a tax resident of the jurisdiction with a preferential system) and to encompass as many relevant connecting factors as possible. It should be noted that the Serbian tax legislator did not expect the Serbian tax authorities to venture into the analysis of where are places of management or effective management of non-resident legal entities, as it had before it 22 years of experience to the contrary. The basic idea was to encompass all the criterion which the targeted jurisdictions would use in their internal legislation to assert the tax or corporate status of legal entities. However, the reach of the definition is limited by virtue of a provision excluding from its scope legal entities that are considered tax residents of the other contracting state for the purposes of application of any of Serbia s double taxation treaties Art. 3a(2) Serbian Corporate Income Tax Law [Zakon o porezu na dobit pravnih lica], Official Gazette of the Republic of Serbia, no. 25/2001, 80/2002, 80/2002, 43/2003, 84/2004, 18/2010, 101/2011, 119/2012, 47/2013, 108/2013, 68/2014, 142/2014, 91/2015, 112/2015 (hereinafter: CITL). 26 Art. 3a(3) of the CITL. 7

8 We notice that the definition of the non-resident legal entity from a jurisdiction with a preferential tax system does not use the criterion place of real management and control as a connecting factor. In other words, a criterion (theoretically) used to determine the Serbian tax residence of companies is not relied on to assert a relevant connection between a non-resident legal entity and a jurisdiction with a preferential tax system. This may imply (we have no other sources to rely on apart from the opinion of the author of this report) that the control element in the residence criterion is understood as essentially referring to ownership. The Serbian legislator was aware that many tax havens enable the ownership structure to be hidden, while it had no particular interest in companies truly belonging to persons from these jurisdictions his targets were companies controlled by Serbian residents. Sourcing rules in the CITL are predominantly based on the tax residence of the payer and of the recipient of specific types of income. 27 In other words, if the payer of a certain type of income (e.g. dividends, interest, royalties) is a resident legal entity, while the recipient is a non/resident one, Serbian withholding tax applies on the distribution. Although neither Serbian jurisprudence nor administrative practice contain examples of the tax residence of a company being challenged, the interaction of the rules applicable to resident and those governing non-resident taxpayers may shed more light on the consequences of such a hypothetical scenario. Namely, from the perspective of tax avoidance, formally non-resident companies, whose Serbian tax residence might be asserted, have been predominantly (ab)used to avoid Serbian capital gains taxation. However, if we were to establish that they are Serbian tax residents by virtue of their place of real management and control being in Serbia, this would imply that they would be obliged to retroactively (with the statute of limitations being 5 years) complete and file Serbian corporate income tax returns under the rules applicable to resident taxpayers. While these provisions would require the payment of tax on generated capital gains (15%), they would completely exempt from taxation dividends received from Serbian resident companies. 28 In other words, such a company might have an underpayment of Serbian corporate income tax on capital gains, but could also have an overpayment of withholding tax on dividends (the statutory 27 Art. 40 of the CITL. 28 Art. 25(1) of the CITL. 8

9 withholding tax on dividends is 20%, while no Serbian double taxation treaty provides for taxation of dividends solely in the state of residence). The issue of residence may be much more relevant from the perspective of tax evasion of individuals. Even if, as a result of deeming a company incorporated abroad a Serbian tax resident by virtue of its place of real management and control being in Serbia, such a company would only be entitled to a tax refund (as e.g. it had suffered Serbian withholding taxes applicable only to non-residents), the consequential administrative obligations could be the source of information relevant for the investigation of potential tax crimes performed by the owners of the company. Serbian tax resident companies are obliged to withhold Serbian personal income taxes and submit in this respect required documentation and tax returns. Therefore, the Serbian tax authorities could by requesting the retroactive performance of reporting obligations within the 5 years statute of limitations period and demanding insight into information relevant for assessing these obligations (transfer details, account information, contracts, etc.) discover unreported payments made to Serbian resident individuals, or to entities which would qualify as non-resident legal entities from jurisdictions with preferential tax systems. In the first instance we might be facing criminal tax evasion, while in the second Serbia could at the very least demand a significant amount of withholding taxes. Unfortunately, not even the possibilities described above were sufficient to induce the Serbian tax administration to venture into the application of the place of real management and control residence criterion. Apart from the SAAR described above and the GAAR found in Art. 9 of the Law on Tax Procedure and Tax Administration 29, Serbian tax legislation does not contain any other anti-avoidance rules which are based on the question of the residence of the taxpayer (e.g. Serbia does not have CFC rules in place). 29 [Zakon o poreskom postupku i poreskoj administraciji], Official Gazette of the Republic of Serbia, no. 80/2002, 84/2002, 23/2003, 70/2003, 55/2004, 61/2005, 85/2005, 62/2006, 63/2006, 61/2007, 20/2009, 72/2009, 53/2010, 101/2011, 2/2012, 93/2012, 47/2013, 108/2013, 68/2014, 105/2014, 91/2015, 112/2015, 15/

10 While the Serbian Personal Income Tax Law relies on the concept of residence of companies from the CITL for the purposes of its norms, the Serbian VAT Law 30 recognizes foreign persons (strana lica) as potential suppliers of goods and services and defines them as persons who do not have their seat or domicile in Serbia. As a rule all those companies incorporated in Serbia will be deemed as domestic persons for VAT purposes (as their incorporation is subject to their seat being in Serbia), while we are yet to see a company incorporated abroad being treated as domestic by virtue of its seat being in Serbia (although this would imply that it may have to incorporate under Serbian law as well). 2. (Tax) residence in an international (cross-border) context 2.1. Residence in (tax) treaties. Despite the fact that the place of incorporation has always been the decisive factor for determining corporate tax residence in Serbia, while the alternative criterion of place (seat) of real management and control has never been applied in practice, the Serbian Model Double Taxation Convention 31 adopts the wording of Art. 4.1 of the OECD Model Tax Convention instead of Art. 4.1 of the UN Model Tax Convention. Furthermore, the Serbian double tax treaty network does not show consistency with respect to the use of the criterion under which a company should be subjected to tax liability in a contracting state for it to be eligible for double tax treaty protection. E.g. if we analyze double taxation treaties concluded by Serbia since 2010, those with Austria, 32 Canada, 33 Montenegro, 34 Norway, 35 Pakistan 36 and Tunisia 37 follow Art [Zakon o porezu na dodatu vrednost], Official Gazette of the Republic of Serbia, no. 84/2004, 86/2004, 61/2005, 61/2007, 93/2012, 108/2013, 6/2014, 68/2014, 142/2014, 5/2015, 83/2015, 5/ The Serbian Model Double Taxation Convention is an unofficial document drafted and used by Serbian double taxation treaty negotiators. Although the document has never formally been made public, academic literature, whose authors are those very same Serbian double taxation treaty negotiators, mention and cite the provisions of the Serbian Model Double Taxation Convention. D. Dabetić, Republika Srbija i izbegavanje dvostrukog oporezivanja Priručnik za primenu međunarodnih ugovora o izbegavanju dvostrukog oporezivanja, Računovodstvo, Belgrade 2008, p. 74, 75, 79, 80, 82 etc. 32 Art. 4(1) of the 2010 Serbia/Austria double taxation treaty, Official Gazette of the Republic of Serbia Int. Agreements, no. 8/ Art. 4(1) of the 2012 Serbia/Canada double taxation treaty, Official Gazette of the Republic of Serbia Int. Agreements, no. 6/ Art. 4.(1) of the 2011 Serbia/Montenegro double taxation treaty, Official Gazette of the Republic of Serbia Int. Agreements, no. 10/

11 of the OECD Model Tax Convention, while the ones with Azerbaijan 38 and Vietnam 39 adopt the solution from Art. 4.1 of the UN Model Tax Convention. A notable exception is the one remaining double taxation treaty concluded since 2010, the one Serbia applies with the United Arab Emirates, 40 in whose Art. 4.1 two separate rules with respect to residence are prescribed for each contracting state, where the one applicable to Serbia follows the provisions of Art. 4.1 of the OECD Model Tax Convention, while the other applicable to the United Arab Emirates deems as its residents companies incorporated in the United Arab Emirates. The described state of affairs testifies that the Serbian double taxation treaty policy makers were not particularly worried or perhaps aware of the issue if the place of incorporation criterion can be understood as any other criterion of a similar nature for the purpose of application of those double taxation treaties which follow the OECD Model Tax Convention. 41 Serbia will as a rule view the provisions of double taxation treaties from the perspective of the source state, while in practice a confirmation from the competent authority of the other contracting state that a particular entity is its resident for the purposes of applying the relevant double taxation treaty will end any discussion on the subject. What may be said in defense of Serbia s attitude is that the CITL place of incorporation criterion, at least in theory, encompasses the place of management, as well as statutory seat, as under domestic corporate law only companies which have their place of real (effective) management in Serbia (seat as per 2011 Corporations Act) may be incorporated under Serbian law. Thus, for all companies which are incorporated in Serbia it might be said that it is assumed that their place of real management and control is also in Serbia with the address of such a place registered as the seat of the company. 35 Art. 4(1) of the 2015 Serbia/Norway double taxation treaty, Official Gazette of the Republic of Serbia Int. Agreements, no. 21/ Art. 4(1) of the 2010 Serbia/Pakistan double taxation treaty, Official Gazette of the Republic of Serbia Int. Agreements, no. 8/ Art. 4(1) of the 2012 Serbia/Tunisia double taxation treaty, Official Gazette of the Republic of Serbia Int. Agreements, no. 6/ Art. 4(1) of the 2010 Serbia/Azerbaijan double taxation treaty, Official Gazette of the Republic of Serbia Int. Agreements, no. 8/ Art. 4(1) of the 2103 Serbia/Vietnam double taxation treaty, Official Gazette of the Republic of Serbia Int. Agreements, no. 7/ Art. 4(1) of the 2013 Serbia/United Arab Emirates double taxation treaty, Official Gazette of the Republic of Serbia Int. Agreements, no. 3/ K. Vogel, Klaus Vogel on Double Taxation Conventions 3 rd ed, Kluwer Law International, London 1997, p

12 The question of what is the meaning of the expression liable to tax found in the residence article of double taxation treaties has so far not been the topic of any concentrated discussion in Serbia, while Serbia has not put forward any position with respect to Art. 4(1) of the OECD Model Tax Convention or its Commentary. 42 Furthermore, Serbia has never insisted on the introduction into its double taxation treaties of anti-avoidance provisions, although it is willing to adopt them at the request the other contracting state. 43 An example of such provisions within the Serbian double taxation treaty network can be found in Arts. 10(7) - dividends, 11(8) interest and 12(7) royalties of the 2015 Serbia/Norway double taxation treaty, each having an essentially identical wording: The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of shares or other rights/debtclaim/the rights in respect of which the dividends/interest/royalties are paid to take advantage of this Article by means of that creation or assignment. The described Serbian attitude towards the question of liability to tax, as well as to antiavoidance provisions is surprising if we note the awareness of the general public in Serbia that foreign companies and double taxation treaties are (ab)used as aggressive tax planning tools. In other words, conciseness that a problem of tax avoidance and evasion through treaty shopping does exist, but so far very little is done to combat this problem. Within the Serbian double taxation treaty network we find one example of a Limitation of Benefits clause in Art. 28 of the 2012 Serbia/Canada double taxation treaty. Under the heading Miscellaneous rules the aforementioned treaty essentially allows Canada to apply its CFC rules 44, while generally limiting the entitlement to the benefits it provides for companies on the basis of the residence of the shareholders and the business activity they perform. However, the 42 Model Tax Convention on Income and on Capital Full Version (as it read on 15 July 2014), OECD, Paris 2014, p. P(4) D. Dabetić, Republika Srbija i izbegavanje dvostrukog oporezivanja Priručnik za primenu međunarodnih ugovora o izbegavanju dvostrukog oporezivanja, p. 46 and Art. 28(1) of the 2012 Serbia/Canada double taxation treaty. 12

13 limitations are centered on companies enjoying a preferential tax regime in their state of residence. 45 Virtually all Serbian double taxation treaties do contain tie-breaker rules for dual resident companies, 46 while these rules usually follow Art. 4(3) of the OECD Model Tax Convention. However, we have so far never seen the application of those provisions in Serbia, as the residence of a company has yet to be challenged by the Serbian tax authorities. From 15 July 2005 until 17 July 2008 Serbia reserved the right to, in its double taxation treaties, replace paragraph 3 of Art. 4 of the OECD Model Tax Convention by a provision that would refer to the mutual agreement procedure for the determination of the country of residence in case of dual resident persons other than individuals, and deny the benefits of a respective treaty in the absence of an agreement between the competent authorities. 47 Double taxation treaties Serbia applies with e.g. Azerbaijan, Latvia, 48 Turkey, 49 and Norway contain examples where instead of Art.4(3) of the OECD Model Tax Convention the contracting states adopted a norm which is similar to the one proposed in Para 24.1 of the Commentary on Art.4(3) of the OECD Model Tax Convention. 50 The 1998 Serbia/Bulgaria 51 double taxation treaty is notable in that its tie-breaker provision for dual resident companies just refers to the mutual agreement between the competent authorities, without mentioning any of the factors which they should take into consideration in order to determine the residence of a company for treaty purposes. 52 Therefore, despite the fact that Serbia is just beginning to notice BEPS developments it would be safe to say that it would in principle be supportive of the recommendation made in OECD BEPS Report on Action 6 to abandon the tie-breaker provision based on the effective place of management and to leave the matter to be settled by mutual agreement. On the other hand, Serbia has so far been unwilling to 45 Art. 28(2) and 28(4) of the 2012 Serbia/Canada double taxation treaty. 46 A rare exception to this rule is e.g. the 2002 Serbia/Kuwait double taxation treaty, Official Gazette of the Republic of Serbia, no. 4/2003, which does not contains a tie-breaker provision. 47 Model Tax Convention on Income and on Capital Full Version (as it read on 15 July 2014), OECD, Paris 2014, p. P(4) Serbia/Latvia double taxation treaty, Official Gazette of the Republic of Serbia, no. 3/ Serbia/Turkey double taxation treaty, Official Gazette of the Republic of Serbia, no. 3/ Art. 4(3) of the 2010 Serbia/Azerbaijan double taxation treaty, Art.4(3) of the 2005 Serbia/Latvia double taxation treaty, Art. 4(3) of the 2005 Serbia/Turkey double taxation treaty and Art. 4(3) of the 2015 Serbia/Norway double taxation treaty. 51 Official Gazette of the Republic of Serbia, no. 1/ Art. 4(2)(4) of the 1998 Serbia/Bulgaria double taxation treaty. 13

14 accept arbitration for the purpose of mutual agreement procedures and it is not likely that this position will change in the near future. 2.2.Tax implications of cross-border changes of residence Serbian legislation does not contain any specific rules regarding either corporate immigration or corporate emigration. In other words, a company immigrating to Serbia would have to incorporate itself as a newly formed legal entity under general rules governing the incorporation of companies, wherein specific assets contributed into the capital of such a legal entity would be appraised or their value would be agreed upon by its founders. 53 Similarly, a company desiring to emigrate from Serbia (e.g. a company which would move its real seat to another country) would have to be winded-up (liquidated), while its assets could be disposed by the shareholder following the process of dissolving the company. While Serbian legislation does not provide for either exit or trailing taxes, liquidation proceeds above the value of the contributed capital are deemed as a dividend for tax purposes. If a Serbian resident company is owned by other Serbian legal entities, such a dividend would be exempt from corporate income taxation. 54 If, however, the shareholders are individuals, regardless of their residence, or non-resident legal entities, the distribution of the liquidation proceeds (the dividend distribution) is taxable. 55 So far EU law did not influence domestic legislation and administrative practice in Serbia 56 with respect to corporate immigration/emigration and it would be safe to assume that the tax legislator will wait for changes to be first introduced in corporate legislation and then follow these developments in tax laws. 2.3.Policy issues 53 Arts. 50 of the 2011 Corporations Act. 54 Art. 25(1) of the CITL. 55 Art. 40 of the CITL and Art. 61 of the Serbian Personal Income Tax Law respectively. 56 Serbia is not a member state of the EU and while it is a candidate country the time-frame of the process of accession, or its success are not certain, particularly taking into consideration the current internal crisis the EU is in. 14

15 The described state of affairs with respect to the attitude of the Serbian tax authorities in determining or challenging the tax residence of companies is even more perplexing if we take into account the attention given to cross-border tax avoidance and evasion by Serbian politicians and media. Namely, the recognition that the wealthiest members of the Serbian society are (ab)using foreign holding companies to channel and control their primarily Serbian investments and assets has for some time become a part of the general discourse. E.g. it has become common knowledge that Cypriot companies, as Cyprus has been one of the most favorite tax planning jurisdictions for Serbian individuals, have some purpose in avoiding Serbian taxation. From approximately 2010 we have witnessed in Serbia a notable political campaign targeting those wealthy Serbian nationals who are seen as not paying their fair share of taxes (in Serbian colloquial tongue they are called tycoons). In the beginning, this campaign was not followed by any concrete actions but was mostly media focused. However in 2012 a sale of shares in a notable Serbian company for close to 1 billion EUR raised too many questions when it was realized that the assets, which were commonly understood to be owned by the wealthiest Serbian individual at the time, were in fact being sold by a Cypriot company wherein no tax was to be paid on the considerable capital gain generated by this transaction (by virtue of the application of the 1985 Serbia/Cyprus double taxation treaty 57 ). It would be justifiable to assume that such a case combined with significant media attention and subsequent political pressure presented a perfect opportunity for the Serbian tax authorities to attempt to challenge the residence of the Cypriot holding company and perhaps assert its Serbian tax residence. Furthermore, the past dormancy of the Serbian tax authorities with respect to cross-border tax avoidance raised the possibility that Serbian taxpayers would not be particularly careful when implementing their tax planning schemes. In other words, some callousness could have been expected from Serbian taxpayers thus raising the chances of successful challenges by the Serbian tax authorities. Surprisingly, a Solomon solution was reached and the Cypriot holding company contributed the shares in question into a Serbian special purpose vehicle (SPV), i.e. a company specifically established in Serbia for the purpose of conducting the sale of shares through it. Finally the shares were sold by the Serbian SPV and 57 Official Gazette of the Socialist Federal Republic of Yugoslavia International Agreements, no. 2/

16 the capital gain generated by the sale was subject to tax in Serbia. 58 A notable opportunity was lost and so far we have not seen any new developments in the story of the place of real management and control residence criterion in Serbia. Although Serbian academics were pointing out that the problem of tax avoidance/evasion by Serbian individuals through the use of foreign conduit companies could, in the absence of CFC rules, be dealt with, at least in the beginning of the process, by first applying the Serbian statutory provisions on tax residence (the criterion of place/seat of real management and control ), 59 their voice was either not heard by or was not loud enough for Serbian tax authorities or tax policy makers. Furthermore, academic debate did notice that the situation of legislation which is not applied or enforced leads to legal uncertainty and that it contains corruption potential. Again, this aspect was not (yet) taken into consideration. Sadly, due to the ever more depleting administrative capacities caused by the austerity regime, the Serbian tax legislator is more and more relaying on broadening the scope of withholding taxation instead of attempting to implement existing solutions. Some Serbian taxpayers were quick to realize the magnitude of the problems they may face if the tax residence of their foreign conduit companies was challenged and, based on the general impression of their actions, they are taking care to follow comparative tax planning strategies to shield from such risks. 2.4.Personal position A personal position with respect to the rules on tax residence of a Serbian author is bound to be a bit schizophrenic. The experience from the last quarter of a century shows that Serbia does not possess the sufficient administrative capacity for the effective implementation and control of residence criterion which require in depth analysis of the facts and circumstances the taxpayers is in. Thus, the primary position with respect to the Serbian situation is that the rules themselves are perhaps of secondary relevance and that it is much more important to work on establishing D. Popović, S. Kostić, op. cit. 16

17 institutions which can apply the rules, whatever the legislator in his wisdom decides to introduce. At this point, facing the rampant problem of tax avoidance and evasion by Serbian resident individuals, through the use of foreign conduit companies and taking into account the evident inability of the Serbian tax authorities to deal with this issue, it may be advisable to introduce a provision deeming all those non-resident (foreign) companies directly or indirectly owned by Serbian residents as having their places of real management and control in Serbia, unless they can prove to the satisfaction of the Minister of Finance that they have substantial business activities in the country of incorporation. Going after the residence of the companies instead of introducing CFC rules would serve three purposes: It would bring Serbian tax authorities into direct conflict with the tax authorities of some of its double taxation treaty partners. There is a perception in Serbia (shared by this author) that our tax authorities are too lenient in accepting the positions of their foreign peers. In the opinion of this author, in a world which is full of jurisdictions that have tailored their domestic legislations to ease activities which harm the badly needed revenues of other nations, those who are in jeopardy should be prepared to be antagonistic to those who are in essence aiding and abetting tax avoidance and tax evasion. It would impose all tax obligations, procedural as well as material, on foreign companies deemed as Serbian tax residents, with procedural (mainly reporting) ones crucial for obtaining information relevant for combating tax evasion and avoidance at the level of the shareholders. CFC rules are usually quite sophisticated and require tailored mechanisms to ensure the avoidance of taxing the same income twice. Serbia does not have the administrative capacity for overly sophisticated solutions. However if one steps out of the Serbian onto the global scene, and reads out loud the definitions of some of the basic pillars of international tax law, such as the concept of residence or the PE, one cannot resist the impression that before him is a world of huge blast furnaces, steel mills and 17

18 coal, sirens leading to thousands of workers going through huge factory courtyards, 60 elegant board rooms with majestic paintings on the mahogany covered walls. If one excuses this overly theatric escapade, it is reasonable to raise the dilemma are the concepts invented in a completely different world still appropriate in an environment which takes for granted that which was only a few decades ago considered as science fiction? Allowing for the accusation of being too skeptical, we may end with a further cause of concern that in addition to questioning the concepts, should we perhaps amend the procedures through which new ones will be designed. Namely, the concept of residence and its definition were invented in a world where fathers were able to comprehend their sons. Today, toddlers use ipads with ease, while their grandparents or even parents find writing a text message on their mobile telephone stressful. Thus, in redefining the elements of international tax law perhaps we should invite to the process those who may not know law or business, but are able to comprehend and prophesize on the ways in which our world is going to change by virtue of technological advancements. 60 The host city of the EATLP conference for which this report is prepared, Lodz, has one of the perfect examples of such a courtyard, although the factory has been turned into a shopping mall appropriately named Manufaktura. 18