Expenses recognized in a limited amount in the tax balance

The general rule for determining corporate income tax is that only expenses incurred for the purpose of conducting business activities and generating income may be recognized in the taxpayer’s tax balance. Expenses that are not related to the taxpayer’s business operations are generally not deductible for tax purposes.

However, the Corporate Income Tax Law provides certain exceptions to this rule, recognizing that some expenses, although not directly connected with business activities, have broader social or economic significance. Therefore, such expenses may be recognized in the tax balance, but only within prescribed limits and subject to specific conditions.

Expenses recognized in a limited amount include:

• expenditures made for certain socially beneficial purposes (healthcare, humanitarian, educational, scientific, religious, sports, and similar purposes);
• investments and expenditures related to culture and cinematography;
• membership fee expenses;
• representation expenses.

The common feature of these expenses is that they are deductible for tax purposes only up to a certain statutory limit. The applicable percentage limitation and requirements for recognition depend on the specific type of expense.

Expenses Made for Certain (Non-Business) Purposes

Expenses related to socially beneficial purposes may be recognized in the tax balance up to a total amount of 5% of the taxpayer’s total revenue.

This limitation applies to expenditures for:

1. healthcare, education, science, humanitarian, religious, and sports purposes, environmental protection, as well as donations made to institutions and social welfare service providers established in accordance with the applicable legislation;
2. humanitarian assistance and assistance provided for the elimination of consequences caused by emergency situations, when such assistance is provided to the Republic of Serbia, an autonomous province, or a local self-government unit.

In order for these expenses to be recognized as deductible expenses in the tax balance, both of the following conditions must be met:

• the donation or expenditure must be made to entities registered or established for the relevant purposes in accordance with special regulations;
• the recipient must use the received funds exclusively for carrying out the activities for which it was established.

This tax treatment represents an incentive for corporate income taxpayers to support activities of broader social importance, such as education, humanitarian work, environmental protection, and cultural development. However, since these expenses are not directly connected with the taxpayer’s business operations, the legislator has limited their recognition in order to prevent potential misuse and unjustified reduction of the taxable base.