By the end of 2022, the Tax Administration began the practice of passing Temporary Decisions in order to determine and collect taxes and contributions for mandatory social insurance on the incomes that citizens earned based on work for foreign employers, starting with the incomes earned in 2017. This practice continued in 2024 for revenues generated in 2019, which raised numerous questions among the professionals.
Without further dealing with the issue of the chosen approach to determining and collecting taxes and contributions for mandatory social insurance, below we will refer to another practice of the Tax Administration, which started at the same time, and it concerns the request for the submission of required documentation in tax control procedures initiated after certain taxpayers filed appeals against Temporary Solutions.
In addition, we emphasize that this text below will only deal with practical cases related to the determination of taxes (contributions for mandatory social security are not the subject of this text) on the income of taxpayers who, in the years for which the Tax Administration owes them, worked exclusively on the territory of other countries, where their business and life interests were, and did not stay in the Republic of Serbia for 183 or more days in the respective tax year, but only had a “formal” registered residence.
Namely, the taxpayers who, after being served with the Temporary Decisions, filed complaints, stating that they were not tax residents of the Republic of Serbia during the periods for which the Tax Administration charged them, were faced with a vague and unfounded request from the Tax Administration to submit, for the periods for which they were charged, certificates of residency in the (foreign) countries where they lived and worked, and where their centers of life and business interests were.
This behavior of the Tax Administration is extremely unclear and, moreover, it is completely arbitrary and legally unfounded. Namely, if we start from the definition of non-resident according to the Law on Personal’ Income Tax, it is clear that the legislator considered all persons who are not tax residents by that term. On the other hand, tax residents are considered to be persons who, on the territory of Serbia:
1) have a residence or
2) have a center of business and life interests, or
3) continuously or intermittently, stay for 183 or more days in a period of 12 months starting or ending in the respective tax year.
If persons fit the mentioned categories, according to the legal provisions, they are considered tax non-residents, which further implies that they cannot be considered tax payers based on the income generated (of course, on the condition that the work on the basis of which the income was generated was not performed on the territory of the Republic of Serbia).
Bearing in mind the cited legal provisions on (non-)residency, the only correct path that should have been followed in the initiated tax control procedures is to prove facts of importance for determining tax residency (such as facts of importance for determining the existence of residence, place of work and existence of family, number of days spent in the Republic of Serbia in the respective tax year, etc.), in order to draw a correct conclusion as to whether a certain person is or is not a tax resident.
Contrary to the above, the Tax Administration, by submitting a request for the submission of certificates of residency of a foreign country, started from proving a negative fact – whether a person is or is not a tax non-resident, which is absolutely wrong, for the reason that, as we previously pointed out, a tax non-resident of the Republic of Serbia is any person who is not a tax resident, and not a person who is a tax resident of a foreign country.
Of course, it is clear that from the very beginning of these proceedings, the Tax Administration acted on the basis of the assumption that persons who formally have registered residences on the territory of the Republic of Serbia are automatically its tax residents.
However, if we know that, according to the Residence Law, residence is the place where a citizen settled (objective element) with the intention of permanently living there (subjective element), i.e. the place where the center of his life activities, professional, economic, social and other ties that prove his permanent connection with the place where he settled is located, the question arises whether the existence of only formal registration (with the absence of both objective and subjective elements, but also the absence of facts indicating a permanent connection with certain place) is a sufficient criteria for establishing tax residency.
Our position is that this approach leads to an incomplete determination of the factual situation, and we believe that any other interpretation would be completely wrong.
Given that the Tax Administration has not yet made first-instance decisions in the majority of cases, the final resolution of the resulting legal vacuum is still not in sight. The only thing left for the citizens is to wait with uncertainty for the outcome of the proceedings, in the hope that, if not the Tax Administration, then at least the Ministry of Finance as a second instance authority (or later the Administrative Court in an administrative dispute), will have more ears for all-round discussion of the subject of the proceedings, as well as a correct approach and a more systematic interpretation and application of the aforementioned legal provisions.
One of the possible solutions to this legal vacuum is certainly the application of the principle of factuality from the Law on Tax Procedure and Tax Administration, according to which tax facts are determined according to their economic essence, which could reduce the importance of the strictly formal (and wrong) interpretation that exclusively registered residence, without essential residence at a certain address, can constitute tax residency.
Of course, the Tax Administration can defend the request for the submission of a certificate of residency of a foreign country by saying that it wants to resolve the residency dispute between Serbia and that foreign country in a fully justified manner, by applying the criteria from Article 4 of the Treaty on the Avoidance of Double Taxation. But what if the income was generated by working in a country with which Serbia has not concluded such an agreement (e.g. with the USA or Tanzania)? Would such a request from the Tax Administration be legally founded even then? The answer is self-evident.