Payment of dividends to legal entities and individuals

After the adoption of the financial statements, companies that make a profit have the legal option or better said an obligation to distribute it.

In partnerships and limited partnerships, the profit is divided equally between the partners, while the limited partners and general partners participate in the distribution of profit and coverage of losses in proportion to their shares, unless otherwise provided for in the founding act. The profit must be paid to the limited partners no later than 90 days after the adoption of the annual financial statements.

In the most common forms of business entities in Serbia – limited liability companies (LLCs) and joint stock companies (JSCs) – profit distribution is carried out in accordance with the articles of association and the Law on Business Companies. The company may distribute profits to members, repay additional payments, loans and make other payments only if the legal requirements are met and the restrictions prescribed by law are respected.

After the financial statements are approved, a company that makes a profit can use it to cover previous losses or legal reserves. If any profit remains after that, it can be distributed to statutory reserves or paid out as dividends.

The deadline for dividend payment begins on the day the director makes a decision on the date of payment.

Dividends may be paid to capital owners as a regular dividend from the profit of the previous business year, based on an appropriate decision, or as an interim dividend.

Dividend payment to a legal entity – resident of the Republic of Serbia

Dividend income and profit shares that a resident legal entity receives from another resident taxpayer are not included in the tax base.

This means that a company that pays dividends to another resident legal entity has no additional tax obligations, because that profit is already taxed by corporate income tax.

Therefore, a resident legal entity receiving a dividend does not pay additional tax on that income.

Dividend payment to a non-resident legal entity

Unless an international agreement on the avoidance of double taxation (DTT) stipulates otherwise, a resident legal entity in Serbia is obliged to calculate and pay a 20% withholding tax on income earned by a non-resident legal entity from dividends and profit shares.

If a dividend is paid to a non-resident from a jurisdiction with a preferential tax system, a higher withholding tax rate of 25% is applied, not only to dividends, but also to income from royalties, interest, rent and services.

The obligation to calculate and pay withholding tax exists not only for regular dividend payments, but also for interim dividend payments, in accordance with the law. Also, withholding tax is calculated when the dividend is not paid in cash, but is used to increase the share capital – in this case, the tax liability arises on the date of registration of the increase with the Business Registers Agency. However, if the assembly decides to invest undistributed profit directly into the share capital without prior distribution of profit, the obligation to calculate withholding tax does not arise because the dividend claim has not been formed.

Dividend payment to an individual – resident of the Republic of Serbia

According to the Personal Income Tax Law, a company that pays dividends to an individual has the following obligations:

• to calculate capital income tax before payment,
• to file a tax return on PPP PD Form,
• to pay the calculated tax, and
• to pay the individual the net amount – after tax deduction.

When paying dividends to individuals, the same accounting rules apply as when paying dividends to legal entities.

If the owner of the capital is an individual resident of the Republic of Serbia, the company that pays dividends is obliged to calculate, withhold and pay withholding tax upon payment.

The tax base for taxation of dividends is the gross amount distributed to the owner based on the decision on the distribution of profits. The capital income tax is 15%.

Income of individuals from dividends is not included in the annual personal income tax base and is taxed exclusively by capital income tax.

Payment of dividends to an individual who is not a resident of the Republic of Serbia

Dividend income paid to a non-resident individual is taxed in the same way as income to a resident – ​​at a rate of 15% on the gross amount. The payer is required to file a declaration on PPP PD Form.

The difference with non-residents is that the provisions of double taxation treaties can be applied, but only if the non-resident proves tax residency status in a country with which Serbia has such a treaty and if they are the beneficial owner of the income.

If a non-resident individual subsequently submits a certificate of residency to the competent tax authority, the difference between the tax already paid and the amount that would have been paid under the double taxation treaty is considered overpaid tax.

The non-resident has the right to file a claim for a refund of that difference, in accordance with the law.

Double Taxation Avoidance Agreements (DTAs) concluded by Serbia allow for dividend income of non-resident individuals to be taxed in Serbia, but at preferential rates provided for in those agreements.

Many DTAs contain two tax rates on dividends: the lower rate applies when the recipient of the income owns at least 25% of the shares in the paying company, but this lower rate applies only to legal entities.

The higher of the two rates always applies to individuals.