Law on Value Added Tax

Tax aspects of continuing the activity of an entrepreneur in the form of a business company

The institution of continuation of activities of entrepreneurs in the form of a company is governed by the provisions of Article 92 of the Law on Business Companies (“Official Gazette of the RS”, no. 36/2011, 99/2011, 83/2014 – other law, 5/2015, 44 /2018, 95/2018, 91/2019 and 109/2021 – from now on Law on Business Companies).

According to Article 92 of the Law on Business Companies, an entrepreneur can decide to continue performing activities in the form of a business company, whereby the provisions of the Law on Business Companies on establishing a given form of the company shall be applied accordingly. Based on the decision on the continuation of activities in the form of a business company, the entrepreneur is simultaneously deleted from the register of business entities, and the registration of the establishment of a business company is carried out, which takes over all the rights and obligations of the entrepreneur arising from business up to the time of the establishment of that business company.

After the loss of the status of an entrepreneur following the provisions of Article 92 of the Law on Business Companies, that natural person remains responsible with all of his assets for all obligations incurred in connection with the performance of activities until the moment the entrepreneur is deleted from the register.

By implementing the institute of the continuation of the activity of an entrepreneur in the form of a company, the property is transferred from the entrepreneur to the company and the legal subjectivity of the person performing the activity is changed (an entrepreneur is a natural person who performs the activity, and the company is a legal entity, therefore a separate legal entity concerning a natural person who acquires the status of a company founder). In addition, the company receives a new registration number and tax identification number.

The tax implications of the implementation of the institute of the continuation of the activity of an entrepreneur in the form of a company can be numerous – VAT treatment of the transfer of assets to a newly founded company, tax consequences on the transfer of absolute rights, deletion of the entrepreneur from the VAT system and registration of the company in the VAT system, the existence of the obligation to submit appropriate reports for the entrepreneur and the newly founded company, the company’s right to a tax refund and tax credit acquired by the entrepreneur, the impact on property tax in statics, possible capital gains and many other issues that may arise in a specific case.

VAT aspect of the continuation of the activity of an entrepreneur in the form of a company

From the point of view of implementing the Law on Value Added Tax (“Official Gazette of RS”, no. 84/2004, 86/2004 – corrected, 61/2005, 61/2007, 93/2012, 108/2013, 6/2014 – harmonized internal law, 68/2014 – other law, 142/2014, 5/2015 – harmonized internal law, 83/2015, 5/2016 – harmonized internal law, 108/2016, 7/2017 – coordinated financial statements, 113/2017, 13/2018 – harmonized financial statements, 30/2018, 4/2019 – harmonized financial statements, 72/2019, 8/2020 – harmonized financial statements, 153/ 2020 and 138/2022 – from now on Law on VAT) and regulations adopted based on this law, during the implementation of the institute of continuation of activities of entrepreneurs in the form of a business company, the three most important issues are:

  • tax treatment of the transfer of the entrepreneur’s business property to the company
  • the procedure for deleting an entrepreneur from the VAT system and registering a company in the VAT system
  • the right of the company to deduct the previous tax on the input invoices that favour the entrepreneur.

Tax treatment of the transfer of the business property of an entrepreneur to a company

When it comes to an entrepreneur as a natural person who performs an activity, the term “entire property” means the entire property that that natural person uses to perform the activity (business property), not his personal property.

The provision of Article 6, paragraph 1, item 1) of the Law on VAT can be applied to the transfer of the business property of an entrepreneur to a company, according to which it is considered that the sale of goods and services in the sense of the Law on VAT, is not carried out in the case of transfer of all or part property, with or without compensation, or as a deposit, if the acquirer is a taxpayer or becomes a taxpayer through that transfer and if he continues to perform the same activity.

If, in a specific case, all conditions for the application of the exception from Article 6, paragraph 1, point 1) of the Law on VAT are met, it is considered that the sale of goods and services has not been carried out and there is no obligation to calculate VAT.

The procedure for deleting an entrepreneur from the VAT system and registering a company in the VAT system

According to the provision of Article 38a paragraph 2 of the Law on VAT, before deletion from the register of economic entities, i.e. another register following the law with the body responsible for maintaining the register, a VAT payer who ceases to perform activities is obliged to, no later than 15 days before of submitting a request for deletion from the register, submit a request for deletion from the register of VAT payers to the competent tax authority.

A VAT payer who ceases to carry out an activity must submit a request to the competent tax authority for deletion from the register of VAT payers no later than 15 days before submitting the request for deletion from the register of business entities, i.e. another register following the law, at authority responsible for keeping that register.

The body responsible for keeping the register can only delete a taxpayer with a confirmation of deletion from the VAT records.

The right of a business company to deduct the previous tax on input invoices that are payable to the entrepreneur

As in this case, the company, following Article 92, paragraph 2 of the Law on Business Companies, takes over all the rights and obligations of the entrepreneur arising from the business, the company also takes over the right to deduct the previous tax on the invoices for the sale of goods and services performed to the entrepreneur before implementing the change in Serbian Business Registers Agency, i.e. before deleting the entrepreneur and establishing a company.

Tax aspects of the continuation of the activity of an entrepreneur in the form of a company from the point of view of the Law on Personal Income Tax and the Law on Corporate Income Tax

According to the provisions of the Law on Personal Income Tax (“Official Gazette of RS”, no. 24/2001, 80/2002, 80/2002 – other laws, 135/2004, 62/2006, 65/2006 – amended, 31 /2009, 44/2009, 18/2010, 50/2011, 91/2011 – decision of the US, 7/2012 – harmonized internal law, 93/2012, 114/2012 – decision of the US, 8/2013 – harmonized internal law, 47/2013, 48/2013 – corrected, 108/2013, 6/2014 – harmonized din. 112/2015, 5/2016 – harmonized foreign exchange, 7/2017 – harmonized foreign currency, 113/2017, 7/2018 – harmonized foreign currency, 95/2018, 4/2019 – harmonized foreign currency ., 86/2019, 5/2020 – harmonized financial statements, 153/2020, 156/2020 – harmonized financial statements, 6/2021 – harmonized financial statements, 44/2021, 118/2021, 132/ 2021 – harmonized financial statements, 10/2022 – harmonized financial statements, 138/2022, 144/2022 – harmonized financial statements and 6/2023 – harmonized financial statements – further: Law on personal income tax ), there is an obligation to submit a final tax return for income tax from self-employment for an entrepreneur, as well as an advance tax return for legal entities for a company.

In addition, there is the question of the possibility of continuing to use the tax incentives used by the entrepreneur, then the question of capital gains and other potential issues such as the payment of the profit transferred to the entrepreneur by the company.

Submission of the final tax return for self-employment tax

Given that the entrepreneur ceases to perform activities in that form and is deleted from the register of business entities, it is necessary to submit a tax return for tax on income from the independent activity for the period from the date of the beginning of the tax period until the day of deletion from the register of business entities, to determine the final tax liability for that period.

Depending on whether it is an entrepreneur who keeps business books or a lump-sum entrepreneur, the entrepreneur submits:

  • tax return on Form PPDG 1S and tax balance or
  • tax return on Form PPDG 1R (flat-rate entrepreneur).

In both cases, the tax return is submitted within 30 days from the entrepreneur’s deletion date from the register of business entities.

Submission of an advance declaration of corporate income tax

According to the provisions of Article 64, para. 1 and 2 of the Law on Corporate Income Tax (“Official Gazette of RS”, no. 25/2001, 80/2002, 80/2002 – other laws, 43/2003, 84/2004, 18/2010, 101/2011, 119/2012, 47/2013, 108/2013, 68/2014 – other law, 142/2014, 91/2015 – authentic interpretation, 112/2015, 113/2017, 95/2018, 86/2019, 153/2020 and 118/2021), a taxpayer who starts performing activities during the year is obliged to submit a tax return within 15 days from the date of entry in the register of the competent authority.

In the tax return, the taxpayer provides an estimate of income, expenses and profit for the tax period, which, for taxpayers registered by the 15th of the month, begins with the month in which they are registered, and for taxpayers registered from the 16th to the end of the month, the first of the following month. The taxpayer also calculates the monthly advance income tax in the tax return.

Therefore, the newly founded business company is obligated to submit a tax return for profit tax, which gives an estimate of income, expenses and profits for the tax period (advance declaration of profit tax).

Determining the capital gain based on the entry of assets into the capital of the company

Given that the Law on Personal Income Tax does not provide for an exception to the application of the rules on taxation of capital gains in the case of the transfer of business property of an entrepreneur, the transfer of which is otherwise subject to the determination of capital gain, to a company, a tax liability for capital gain may arise.

(Im)possibility of continuing to use tax incentives and benefits by the company

Due to the change in legal subjectivity, the Ministry of Finance of the Republic of Serbia decided that the tax incentives and benefits used by the entrepreneur are not transferred to the company; that is, the company cannot continue to use them. Also, the Ministry of Finance of the Republic of Serbia took the position that the entrepreneur, in this case, loses the right to benefits for the employment of newly employed persons, and the same could be said analogously for other benefits for employees.

Unused tax credits for investments in fixed assets, stipulated by the previously valid Article 48 of the Law on Corporate Income Tax, cannot be transferred to a company.

Given that the company is liable for corporate income tax, and the entrepreneur is responsible for income tax from self-employment, the company does not have the right to use the tax losses and capital losses shown in the entrepreneur’s tax balance sheet.

Payment of the transferred profit to the entrepreneur by the company

The law on personal income tax or any other law does not regulate this issue, so it can be said that there is a specific risk of a different interpretation by the Tax Administration in the tax control procedure (that the payment in question is characterized as taking from the company’s property, etc.).

Tax aspects of the continuation of the activity of an entrepreneur in the form of a company from the point of view of the Law on Property Taxes

From the point of view of the application of the Law on Property Taxes (“Official Gazette of the RS”, No. 26/2001, “Official Gazette of the FRY”, No. 42/2002 – decision of the SUS and “Official Gazette of the RS”, No. 80/2002, 80/2002 – other laws, 135/2004, 61/2007, 5/2009, 101/2010, 24/2011, 78/2011, 57/2012 – US decision, 47/2013, 68/2014 – other law, 95/2018, 99/2018 – decision US, 86/2019, 144/2020, 118/2021 and 138/2022 – hereinafter: Law on Property Taxes), tax implications may arise when continuing to perform activities in the form of a company concerning the potential occurrence of tax liability on the transfer of absolute rights when transferring certain rights as a stake in a business company, as well as concerning property tax in statics, in terms of the termination of the obligation for the entrepreneur and the occurrence of the obligation for the business company.

Tax on transfer of absolute rights

In the case of the transfer of any of the rights specified in Article 23 of the Law on Property Taxes during the continuation of the activity of an entrepreneur in the form of a business company, where VAT is not paid on that transfer, that transfer is subject to taxation with the tax on the transfer of absolute rights.

The Law on Property Taxes did not prescribe a tax exemption for this case.

However, if the entrepreneur transfers property to the company as a (non-monetary) contribution to the capital of the newly founded company, the provision of Article 31, paragraph 1, point 3) of the Law on Property Taxes can be applied, which prescribes tax exemption for the investment of absolute rights in the capital of the company – resident of the Republic of Serbia, per the law governing commercial companies. In this case, there is an obligation to submit a tax return for the tax on the transfer of absolute rights by the natural person who transfers the property, given that the existence of a tax liability or tax exemption for the tax on the transfer of absolute rights is determined by the Tax Administration by decision.

The tax mentioned above exemption, following Article 31, paragraph 4 of the Law on Property Taxes, does not apply to the transfer of ownership of a motor vehicle, vessel, or aircraft.

Therefore, if an entrepreneur were to transfer a used motor vehicle, vessel or aircraft as part of the transfer of property as a contribution to the capital of a newly founded company, there would be an obligation to pay tax on the transfer of absolute rights.

Property tax in statics

When the continuation of an entrepreneur’s activity in the form of a company, real estate is transferred to the newly established company, then the obligation to pay property tax for that real estate to the entrepreneur ends, and the tax liability for the company arises.

In this regard, the entrepreneur is obliged to report the termination of tax liability for property tax to the competent local tax administration within 30 days from the date of deletion from the register, and the company should report the occurrence of tax liability within the same period.

On the other hand, the business company must submit a tax return for the acquired immovable property on Form PPI 1 within 30 days from the date of acquisition (in the specific case of the establishment of the company).

Responsibility of the company for the tax obligations of the entrepreneur

A business company that takes over the business property of an entrepreneur while continuing to carry out the entrepreneur’s activities in the form of a business company is responsible for the obligations arising from the entrepreneur’s business up to the amount of the assets taken over.

On the other hand, a natural person remains responsible for all obligations arising from the performance of activities until the moment of deletion from the register of economic entities, including tax obligations, and that with all of his assets.

The right of a company to a refund of overpaid tax

In this regard, the company can use any overpayments on public revenue accounts that the entrepreneur had, i.e. has the right to refund or offset these overpayments. The request for refund or rebooking is submitted based on Article 10 of the Law on Tax Procedure and Tax Administration.

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