Taxation of Cloud Services in Serbia

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Henry Fitzgerald
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1 Taxation of Cloud Services in Serbia

2 The Cloud, a technology that opened the door to a completely new set of IT services, is presenting a considerable challenge to legislators, primarily regarding personal data protection and taxation of cloud computing. Cloud computing taxation is a challenge because of what the cloud represents the possibility to access certain IT services online. In other words, since access to cloud services depends only on Internet access, and not on the location of the person accessing and the person enabling access, the question of which country is entitled to/should tax cloud services, and how, therefore arises. Cloud technology is still in its early stages in Serbia, and therefore the question of cloud taxation has not been a major issue so far. However, in March 2013 Serbia enacted a Strategy for Development and Support to the Information Technology Industry, as well as an Action Plan to implement this Strategy. Although the Strategy and Action Plan themselves make no mention of cloud computing, these documents deal, among other matters, with tax relief for software companies. This text analyses the tax position of foreign cloud companies providing cloud services in or from Serbia, taking into account the characteristics of the various cloud computing models and elements - SaaS, PaaS and IaaS; Private, Public, Community and Hybrid; and Consumption, Subscription, Advertisement and Market.

In other words, since access to cloud services depends only on Internet access, and not on the location of the person accessing and the person enabling access, the question of which country is

3 TAXATION OF CLOUD SERVICES IN SERBIA 3 A) Foreign cloud companies providing cloud services from abroad to individuals, companies and governmental bodies in the Republic of Serbia Article 40 of the Corporate Income Tax Law specifies that withholding tax at the rate of 20% is to be calculated and paid on income generated by a non-resident taxpayer from a resident legal entity on the grounds, inter alia, of consideration for copyright and related rights and industrial property rights. This Article also specifies an additional rule that withholding tax at the rate of 25% is to be calculated and paid on income generated by a non-resident legal entity from a jurisdiction with a preferential tax system on the basis of copyright and related rights and industrial property rights, interest, consideration for immovable and movable property lease and sublease, and consideration for services, regardless of where they are provided or used. A cloud service could be characterized as consideration for copyright and related rights and industrial property rights. Namely, the Corporate Income Tax Law contains no definition of these rights, but the Personal Income Tax Law lists the rights on which natural persons pay tax on income from copyrights, copyright related rights and industrial property rights, while the Law on Copyright and Related Rights specifies that software is considered to be a work of authorship. On the grounds of the above rules, it seems safe to conclude, with a great deal of certainty, that consideration in the SaaS model is consideration on the grounds of copyright and related rights and industrial property rights, and that resident legal entities would be obliged to calculate and withhold income tax on the consideration they pay for provided SaaS cloud services in the context of Article 40 of the Corporate Income Tax Law (while natural persons would not, as Article 40 mentions only income generated by non-resident taxpayers from resident legal entities, not resident natural persons.

inter alia, of consideration for copyright and related rights and industrial property rights.

4 4 TAXATION OF CLOUD SERVICES IN SERBIA By the same token we could also conclude that consideration in the IaaS model is not consideration on the grounds of copyright and related rights and industrial property rights, and that there would be no obligation to calculate and withhold income tax. On the other hand, with IaaS services provided by a nonresident legal entity from a jurisdiction with a preferential tax system, there would be an obligation to calculate and withhold income tax at the rate of 25%. In the case of the PaaS model, due to the fact that users are also given access to a platform - and space to install their software, the treatment of the consideration for use of the cloud service would depend on the other elements of the business model. Thus, it would seem that with PaaS charged by the Consumption model, the emphasis is on placing space at the disposal of the user, while in the case of PaaS charged according to the Subscription model, disposal of users is the dominant element. With the Advertising model, software is also the major component, as the same software is used for broadcasting advertisements. The Market model, on the other hand, seems to once again place emphasis on space.

On the other hand, with IaaS services provided by a nonresident legal entity from a jurisdiction with a preferential tax system, there would be an obligation to calculate and withhold income tax at

5 TAXATION OF CLOUD SERVICES IN SERBIA 5 B) Foreign cloud companies providing cloud services to third parties from Serbia In this case the key question is whether the foreign company has a permanent establishment in Serbia. If not, its tax status with regard to services provided to Serbian residents is the same as if the services were provided from abroad, while with regard to other non-resident beneficiaries of services there would be no tax obligations in Serbia. If the cloud company were considered to have a permanent establishment in Serbia, that permanent establishment would have resident status and would pay corporate income tax. When we say a foreign cloud company is providing cloud services from Serbia, we primarily mean that the cloud company owns servers in the territory of Serbia through which the services are provided. However, besides this case, it is also possible for a cloud company to lease servers located in Serbia, or for those servers not to be located in Serbia at all, but only the persons providing customer support, monitoring and recovery services and the alike. To reply to the question of whether a permanent establishment exists in all these cases, we refer to Article 4 of the Corporate Income Tax Law, which specifies in which cases a non-resident is considered to have a permanent establishment in the Republic of Serbia. Although a fairly extensive article of the Law, it unfortunately does not give an unambiguous answer. Analyzing the listed typical cases of existence or non-existence of a permanent establishment, it seems reasonable to conclude that a permanent establishment should not be considered to exist in any of the above cases. On the other hand, given that the basic rule states every permanent place of business, the opinion that a permanent establishment exists, especially in the case of owning servers, could also not be considered erroneous.

If not, its tax status with regard to services provided to Serbian residents is the same as if the services were provided from abroad, while with regard to other non-resident beneficiaries of

6 6 TAXATION OF CLOUD SERVICES IN SERBIA Perhaps in deliberating this issue one should also consider the Strategy mentioned above if the Republic of Serbia has opted for development of the IT industry, perhaps the Republic of Serbia, for opportunistic reasons, should opt that a permanent establishment exists in none of these cases, in order to thereby attract cloud service providers to provide such services from Serbia, and to compensate lower tax revenues therefrom by increase in the employment rate or income from leases that would be generated (and on which tax would be paid) by residents of the Republic of Serbia. Based on all of the above, we conclude that it would be useful, as a first step, to amend the Corporate Income Tax Law, in order to clarify the open issues pinpointed by this text clearly defining the rules regarding existence or non-existence of a permanent establishment, and the rule on whether and when consideration for cloud services is classified as consideration on the grounds of copyright and related rights and industrial property rights as under Article 40 of the Law, all for the purpose of prescribing clear rules and a clear tax treatment regarding cloud services, which would certainly contribute to Serbia becoming a more attractive location for large multinational companies providing cloud services. COMMENTED BY: NIKOLA DJORDJEVIC, ATTORNEY AT LAW JPM JANKOVIĆ POPOVIĆ MITIĆ LAW OFFICE

services from Serbia, and to compensate lower tax revenues therefrom by increase in the employment rate or income from leases that would be generated (and on which tax would be paid) by residents of

7 TAXATION OF CLOUD SERVICES IN SERBIA 7 NIKOLA ĐORĐEVIĆ Nikola is a Partner and his practice is mainly Tax and M&A law. Nikola advises clients on diverse tax law issues and represents them in the tax procedure and administrative tax disputes concerning VAT, corporate income tax, tax on wages and social security contributions, capital gain tax, tax on income from capital etc. He acts as tax consultant to a number of domestic and international companies and individuals. AREAS OF PRACTICE - Tax Law - Mergers and Acquisitions (M&A) - Energy Law - Banking & Insurance - Corporate Law Membership - Taxation Comitee of Foreign Investors Council (FIC) - Serbian Fiscal Association - International Fiscal Association (IFA) - International Association of Young Lawyers nikola.djordjevic@jpm.rs Linkedin profile: Twitter:

contributions, capital gain tax, tax on income from capital etc. He acts as tax consultant to a number of domestic and international companies and individuals.

8 JPM JANKOVIC POPOVIC MITIC Address: NBGP Apartments, 6 Vladimira Popovića street Belgrade, Serbia Phone: , Fax: office@jpm.rs, Online:

Belgrade, Serbia Phone: +381 11 207-6850, Fax:

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