Taxation of Software Supplied by Foreign Companies

by | Nov 12, 2012 | Blog | 0 comments

When importing goods into Serbia, importers rely on their forwarding agents who guide them not only through the import procedures, but also customs and foreign exchange regulations related to their niche. The Customs Administration is also involved as they issue a declaration on the imported goods and a customs invoice encompassing all the customs fees owned by the importer. This eliminates any uncertainty regarding operating procedures.

However, this type of support doesn’t exist when importing services from abroad. This lack of support may lead some legal business entities not to settle dues on imports because they are unaware such dues exist.

The situation becomes even more complicated with some specific transactions (e.g., the purchase of computer software.)

In the past, many companies requested that their foreign partners deliver computer software on compact discs. That way, the import of software could be treated as an import of goods rather than services. Customs and VAT burdens for the importer would be calculated on the physical media itself. This manner of conducting imports produced customs duties which by far exceeded the actual value of the goods cleared through customs.

These days, such workarounds are not necessary. Software procurement represents the purchase of the license or copyrights from a non-resident and is treated as a service. There is no restriction on downloading specific software or on any other method of acquiring it from the foreign seller. The document accompanying the delivery is the supplier’s invoice.

The procurement of services from foreign companies is not subject to customs clearance or duties. The buyercalculates VAT obligations on the service, software in this case, following the relevant regulations.

However, there is one more obligation for the importer, which is the payment of withholding tax as per the Corporate Income Tax Law.

Namely, Article 40 of the Law stipulates that a 20% withholding tax will be applied to income generated by a non-resident on the basis of copyright and related rights unless otherwise specified in the international double taxation avoidance agreement.

This means that the company (importer) purchasing the software (the right to use copyrighted material) is obliged to calculate and pay withholding tax on the gross amount of the purchase fee stated in the invoice.

If the Republic of Serbia has an agreement to avoid double taxation with the country where the supplier resides, a reduced tax rate is applied (generally 10%). For this rate to be used, the foreign seller is required to produce proof of fiscal residence to the domestic buyer, issued by the relevant authority of their home country.

The buyer –  a resident legal business entity calculates and pays the withholding tax within three days from the time payment is made to the supplier. A tax return for the taxes paid is completed within the same deadline.

Fees are calculated after deductions. Therefore, the tax base is a gross fee (fees paid to the foreign supplier + tax). Regulations don’t explicitly state if the value of the invoice or the customer’s invoiced value should be increased by the tax amount to arrive at the gross total. This can be negotiated in the contract between the buyer and the supplier.

If agreed that the invoiced value is the net amount, the importer then calculates the gross value. To do this, the net value is multiplied by a 1.25 coefficient. The resulting gross value is subject to a 20% withholding tax. The tax is paid to the relevant state authorities, while the net value of the invoice is paid to the supplier.

In this way, the foreign business partner receives the total amount agreed, and the importer squares the invoiced amount with invoice paid. This is the procedure used in practice and is in line with the principles applied to other withholding taxes.

Please note that the withholding tax is not paid on other services in the field of information technology which don’t fall into the category of copyright licensing (e.g., software installation and support provided by a foreign business partner to the software user.)

Take a look at the Ministry’s relevant opinion here.

Remember that the withholding tax is a part of VAT calculations which are mentioned at the beginning of this post.

If you found this post useful, you may also be interested in the following topic: How to determine the date when services are rendered in foreign transactions? You can check the answer here.


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