Recently, in our business practice, we often encounter a misunderstanding of the difference between a foreign representative office and a branch of a foreign legal entity. The representative office of a foreign entity is not recognized as a legal entity in the Republic of Serbia, pursuant to Article 574 of the Law on Companies, which states that the representative office of a foreign company represents a separate organizational part of the foreign legal entity, with the authority to carry out preliminary and preparatory activities in order to conclude the legal activity of that company.
In accordance with the abovementioned, the representative office is not subject to the obligation to provide justification for the payment of funds from the account of the representative office maintained at a local commercial bank, in terms of the provisions of the law regulating accounting.
In the matter of the branch of a foreign legal entity in Serbia, the situation is completely different. A foreign legal entity may perform activities on the territory of the Republic of Serbia through a branch that is established and registered in accordance with the regulations of the Republic of Serbia.
Registration and performing business activities of a branch of a foreign legal entity are carried out in accordance with the following regulations: the Law on Companies, the Law on the Procedure of Registration with the Serbian Business Registers Agency (Official Gazette of the RS, Nos. 99/2011, 83/2014, 31/2019) and the Law on the Execution of Payments of Legal Persons, Entrepreneurs and Natural Persons Not Performing Commercial Activity (Official Gazette of RS, No. 68/2015).
Given the fact that the branch of a foreign legal entity is considered a resident, it is subject to the obligation to provide justification for the payment of funds from the account of the branch maintained at a local commercial bank.
A non-resident taxpayer is subject to taxation of profits in accordance with the Profit Tax Law, which they generate by performing business activities through a permanent business unit, in the manner prescribed by this law, unless otherwise prescribed by an international treaty on the avoidance of double taxation.
A non-resident taxpayer who performs activities through a permanent business unit, which does not keep business records, in accordance with the regulations governing accounting, is obliged to keep records in that permanent business unit that include all data on income and expenditures, as well as to submit a tax basis balance sheet and a tax return. This primarily refers to the representative offices of foreign legal entities, which do not keep business records, in accordance with the regulations.
In other words, the non-residents who generate profit on the territory of Serbia will also be taxed with profit tax, if they do not have the status of a permanent business unit in terms of international agreements. For example, this means that, if a resident of the Russian Federation owns a business unit in Serbia for less than a year, that profit will only be taxed in the Russian Federation; however, in accordance with Article 5 Paragraph 3, this non-resident will have the obligation to submit a tax return and tax basis balance sheet to the competent tax authority. The tax return and the tax basis balance sheet must be submitted by March 31, 2023.