A foreign company branch office is a separate organizational unit of a company in the territory of the Republic of Serbia through which the company performs activity in accordance with the law.
A foreign legal entity may permanently perform activities on the territory of the Republic of Serbia through a branch established and registered following the regulations of the Republic of Serbia. The following rules regulate the registration and operation of a component of a foreign legal entity:
- Companies Act
- The Law on the Registration Procedure in the Business Registers Agency
- Foreign Trade Act
- Law on Foreign Currency Transaction
- Law on Payment Operations
- Law on Accounting
- other bylaws adopted based on the said laws.
Regarding the application of tax regulations, the branch of a foreign legal entity applies the rules relating to domestic legal entities, as follows:
- Law on Tax Procedure and Tax Administration
- Law on Value Added Tax
- Law on Corporate Income Tax
- Law on Property Taxes
- Law on Personal Income Tax
- Other bylaws adopted based on the said laws.
Branch of a foreign company from the aspect of foreign trade operations and the Law on Foreign Currency Transaction
Under of performance of business operations of a foreign person in the Republic of Serbia, as a form of a foreign trade business in terms of Article 2 of the Foreign Trade Act shall be deemed:
- Direct investments and
- Capital projects of a foreign person in the Republic of Serbia, i.e., a domestic person in another state or customs territory.
Direct investments means the incorporation of a company, branch, purchase of equity or capital shares of a company, recapitalization of a company and any other shape of investment by a foreign person in the Republic of Serbia, i.e. a domestic person in another state or customs territory.
From aspect of the Law on Foreign Currency Transaction by the Article 2 point 1 subpoint 3, it is prescribed to Branch of a foreign legal person entered into the register with the competent body in the Republic shall be deemed a resident for this law.
The provisions of the Law on Foreign Currency Transaction, which are essential for the operations of a branch of a foreign legal entity in the country, are:
- In accordance with Article 18 paragraph 11 of Law on Foreign Currency Transaction, branch of a foreign legal entity in Republic may get a line of credit or a loan from abroad with maturities longer than one year, which are used by payment of the loaned funds to the bank account of that resident, while such lines of credit and loans may be acquired by a resident – branch of a foreign legal entity from a non-resident – founder.
- Resident – legal entity, a branch of a foreign legal entity or entrepreneur may set off debts and claims on the basis of realized resident’s foreign trade of goods and services which is not considered to be commercial credit facility and loan.
- Branch of a foreign legal entity may set-off debts and claims arising from international credit facility operations in foreign currency with claims or debts arising from these operations, from realized foreign trade of goods and services as well as from direct investments and investments in real estate under conditions prescribed by the National Bank of Serbia.
- In accordance with Article 29 of Law on Foreign Currency Transaction, branch of a foreign legal entity that operates through a resident account, perform transfer from these accounts to abroad provided that they have previously settled the tax liabilities from that transaction to the Republic whereof branch of a foreign legal entity shall submit the confirmation of the competent tax authority on paid tax obligations.
Business books and financial reports of a branch of a foreign legal entity
In accordance with Article 4, paragraph 3 of the Law on Accounting, the provisions of this law also apply to branches and other organizational units of foreign legal entities based abroad, which perform economic activity in the Republic of Serbia, unless otherwise regulated by special regulations.
No special regulations in accounting have been adopted for branches of foreign legal entities, so branches of foreign legal entities keep business books and compile financial reports in the same way as domestic legal entities.
The branch of a foreign person keeps business books according to the double-entry bookkeeping system following the Law on Accounting. The branch is classified, like all other legal entities, per the classification criteria prescribed by the Law on Accounting, and under that, it selects a specific financial reporting framework.
For the recognition, measurement, presentation and disclosure of items in the financial statements, the branches, depending on how they are classified, may apply:
- International Accounting Standards (from now on: IAS), i.e. International Financial Reporting Standards (from now on: IFRS) – large legal entities required, and medium, small and micro if they choose, starting from 2020.
- International Financial Reporting Standard (IFRS) for small and medium-sized entities – small mandatory, and medium and micro if determined.
- Rulebook on the manner of recognition, valuation, presentation and disclosure of positions in individual financial statements of micro and other legal entities – micro, if they do not opt for the application of IFRS for SMEs or IAS / IFRS, starting from 2020.
For the records of assets, liabilities, income and expenses, the branch applies the Rulebook on the Chart of Accounts and the contents of the accounts in the Chart of Accounts for companies, cooperatives and entrepreneurs.
As a taxpayer of the Law on Accounting, the branch of a foreign legal entity should have a general act (usually the Rulebook on Accounting and Accounting Policies) that will define the accounting policies chosen in accordance with the above financial reporting framework and its accounting organization. Also, it is understood that the branch can use the so-called. group accounting policies, i.e. policies used by their founder, but which must be supplemented with the requirements from Article 8 of the Law on Accounting.
The branch keeps business books and all other legal entities subject to the Law on Accounting, namely: diary, general ledger and auxiliary books.
Regarding the financial statements for the branch of foreign legal entities, we highlight the following:
- The regular annual financial report is prepared for the business year, equal to the calendar year, i.e. as of December 31 of the current year. Exceptionally, with the consent of the Minister responsible for finance, i.e. the National Bank of Serbia for legal entities within its competence (except banks), or the Securities Commission for legal entities within its competence, the branch may prepare financial statements for a business year that is different from the calendar.
- Following Article 1, paragraph 3 of the Rulebook on the content and form of forms of financial statements for companies, cooperatives and entrepreneurs, this Rulebook applies to branches and other organizational units of foreign legal entities engaged in economic activity in the Republic of Serbia. The scope of the branch’s regular annual financial reports depends on the branch’s size, i.e. whether the branch is classified as a large, medium, small or micro legal entity.
- Audit of a foreign legal entity branch is performed following Article 26 of the Law on Audit. Per the Law on Audit, the audit is mandatory for regular annual financial statements of large and medium legal entities classified in accordance with the law governing accounting. Following the law governing the capital market, regardless of their size, as well as all legal entities, i.e. entrepreneurs whose total income generated in the previous business year exceeds EUR 4,400,000 in dinar equivalent (legal audit).
- Extraordinary financial reports are also prepared in cases of deletion of a branch of a foreign legal entity, when the branch compiles detailed financial information, including the Balance Sheet and Income Statement (Article 2, paragraph 1, item 8) of the Law on Accounting.
Branch of a foreign person from the aspect of tax liabilities
In accordance with the Law on Property Taxes, the taxpayer who keeps business books, in terms of property tax, is a branch and another organizational part of a foreign legal entity that performs business activities in the Republic of Serbia and which keeps business books following regulations of the Republic of Serbia.
The provisions of the Law on Tax Procedure and Tax Administration stipulate that, in addition to other taxpayers, a permanent business unit of a non-resident legal entity is obliged to have a personal identification number. The provision of Article 2 of the Rulebook on Assigning a Tax Identification Number to Legal Entities, Entrepreneurs and Other Entities for Registration of which the Business Registers Agency is competent stipulates that legal entities, entrepreneurs and other entities for which the Business Registers Agency is competent are assigned by the Tax Administration – Headquarters through the Business Registers Agency.
Under the permanent business unit of a non-resident legal entity in terms of Law on Tax Procedure and Tax Administration is considered a permanent business unit of a non-resident legal entity defined by the provisions of the law governing corporate income tax.
According to Article 4, paragraph 1 of the Law on Corporate Income Tax stipulates that a permanent establishment is any permanent place of business through which a non-resident taxpayer performs business, in particular: branch, plant, representative office, place of production, factory or workshop, mine, quarry or another place of exploitation of natural resources.
According to the provisions of Article 5, paragraph 1 of the Law on Corporate Income Tax, a non-resident taxpayer who performs activities in the territory of the Republic by doing business through a permanent business unit that keeps business books following regulations governing accounting (branch and other organizational parts of non-resident perform the activity), determines the taxable profit following the Law on Corporate Income Tax and submits a tax balance and a tax return for the permanent business unit.
According to the Law on Corporate Income Tax and the Rulebook on the Content of Tax Balance and Other Issues of Importance for the Method of Determining Corporate Income Tax, tax balance and tax return are also submitted by a non-resident taxpayer who performs activity in the Republic through a permanent business unit (branch and other organizational parts of the non-resident taxpayer).
To determine the corporate income tax base, the corporate income taxpayer, including the branch, compiles the tax balance on Form PB 1 – Taxpayer Corporate Income Tax Balance for the period from ______ to _____ 201_. years. The tax return for calculating corporate income tax is submitted on the Form PDP – Tax return for advance payment – final determination of corporate income tax, following the Rulebook on the content of the tax return for the calculation of corporate income tax.
A permanent business unit that does not keep books under accounting regulations and through which a non-resident taxpayer performs activities in the territory of the Republic also submits a tax return exclusively in electronic form, provided that these permanent establishments offer a tax return as an attachment. Tax balance on the Form PBPJ, also in electronic form, following the Rulebook on reporting income and expenses to determine the profit that the permanent business unit of a non-resident taxpayer realizes in the territory of the Republic of Serbia.