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Transfer pricing in Serbia

Following the changes in the Corporate Income Tax Law in December 2012, the Ministry of Finance has enacted new Rulebook on transfer pricing in 2013. By enacting this Rulebook, Serbia has completed the reform of its transfer pricing legislation and now has rather detailed rules in place.

Legal framework for application of tax rules on transfer pricing is given in following enacted documents:

  • Corporate Tax Law („Official gazette RS", no. 25/2001, 80/2002, 80/2002, 43/2003, 84/2004, 18/2010, 101/2011, 119/2012, 47/2013 and 108/2013)
  • Rulebooks enacted in accordance with Corporate Tax Law:
    • Rulebook on Transfer Pricing („Official Gazette RS“, no. 61/2013, 8/2014),
    • Rulebook on list of jurisdictions with preferential tax system ("Official Gazette RS", no. 122/2012)
    • Rulebook on tax return ("Official Gazette RS", no. 99/10, 8/11, 13/12 and 8/13 ) and ("Official Gazette RS", no. 20/14 )
    • Rulebook on „arm’s length interest rates“ ("Official Gazette RS", no. 17/2014)
    • And other legal acts
  • Income tax Law ("Official Gazette RS", no. 24/01, 80/02, 80/02, 135/04, 62/06, 65/06, 31/09, 44/09, 18/10, 50/11, 91/11 US, 93/12, 114/12 - US, 47/13, 48/13, 108/13)
  • Double taxation avoidance treaties
  • OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010

Transfer pricing documentation for financial 2013 and following years is mandatory. Content of this documentation is prescribed. Transfer pricing documentation needs to be filed to relevant tax office along with corporate income tax return no later than 30 June each year for the previous year.

New transfer pricing rules

The new transfer pricing rules are generally in line with the OECD approach and best international practice in this area, with certain local specifics:

  • Related parties criteria are broadly defined and include, among other, direct or indirect control or ownership of 25%, joint control and management, family relationships and residency in listed preferential tax jurisdictions.
  • All transactions with related parties are in scope of documentation. No materiality threshold is prescribed.
  • Transfer pricing rules apply to all types of related party transactions and to both, domestic and cross-border transactions.
  • The allowed methods are comparable uncontrolled prices, cost plus, resale minus, transactional net margin and profit split. In case none of these methods is applicable, the taxpayers are allowed to use any other method which would be deemed appropriate for specific transaction. None of the methods is considered preferred.
  • Transfer pricing documentation should encompass analysis of the business of the group and the individual entity, functional analysis, choice of method for testing the related party transactions, conclusion on whether the related party transactions are arm’s length and appendices.

For preparation of benchmarking studies the following rules apply:

  • Local Serbian benchmarking is preferred.
  • Transfer price is at arm’s length only if between first and third quartile.
  • Benchmarking studies must be based on latest published data.

Implications for the business

Companies that have related party transactions must prepare rather comprehensive, detailed and up to date transfer pricing documentation and file it to the tax authorities within deadline.

These are the risks faced by companies with the related party transactions:

  • Local tax re-assessments;
  • Potential double taxation of income where relief under tax treaties is not available (due to fact that the Serbian Ministry of Finance rarely applies the Mutual Agreement Procedure);
  • Penalties and interest on overdue tax.

Serbian companies cannot discard the possibility of being challenged by the tax authority, no matter how much of a conservative transfer pricing strategy they adopt. The burden of proof is on taxpayers to establish transfer pricing at arm’s length in a way compliant with the local documentation requirements. It is not sufficient for taxpayers to presume that they have the right answer – they will need to be able to prove it.

How to best prepare for complying with new rules

Although the documentation can be finalised only after the financial results are available, certain preparatory activities and analyses can be performed earlier.

Having in mind that preparation of transfer pricing documentation requires significant time and input from various functions within the organisation, it would be recommendable to commence with some work as soon as possible in order to secure meeting the filing deadline and to avoid excessive cost. That could include:

  • Review of current related party pricing policy, consistency of its application and its results for any amendments, fine-tuning in order to avoid double taxation and to secure foundation for successful documenting.
  • Check whether there is available transfer pricing documentation at the level of the group and what can be done to adapt it to the local requirements. In this respect a special consideration should be given to the Serbian requirements in respect of preparing benchmarking studies.
  • Check whether the documentation prepared for previous years and the approach used in this respect is in line with the new regulation.
  • Commence with the analysis that can be performed before the end of financial year (e.g. functional analysis, preparation of the information about the business of the group and similar).

Our service

Our services include the following:

  1. We perform an analysis of your inter-company dealings, transaction by transaction; we review the inter-company agreements, the transfer pricing policies available at the group level, the compliance of your group transfer pricing documentation with the local rules and the availability of the supporting documentation.
  2. We will provide you with a report that would include our comments on the tax risk associated with each inter-company transaction, including an estimate of the potential tax adjustment (where possible); the appropriateness of the existing transfer pricing documentation. If, during our review, we identify tax optimization opportunities, we will bring them to your attention.
  3. Performing a benchmarking study to test the arm’s length nature of an inter-company transaction. We use Amadeus database which is most used in SEE countries and accepted by Serbian Tax Authorities.
  4. We can help you during all stages of the tax audit. Through understanding the economics of your business, we will assist you in the discussions with the tax authorities and we will help you defend your position.

TP documentation shall be issued both in Serbian and in English, and contract for our services would be signed in Serbian and English as well.

Just send your question and we will get back with the proper information in short time!

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