The National Assembly of the Republic of Srpska (RS) adopted amendments to the Profit Tax Law on 28 December 2016. The main changes have become effective as of 1 January 2017 and will be briefly presented in this article.
With the amendments, the Law clarifies the definition of “taxable person” and harmonizes the concept of residence with the Profit Tax Law of the Federation of Bosnia and Herzegovina (FBiH) and Brcko District in order to avoid double taxation. Namely, a company is considered resident in BiH if it is registered as a legal entity there. An entity has a taxable presence in BiH if it carries out business activities in the jurisdiction that meet the criteria for a permanent establishment.
The sources of taxable income are as follows:
- profit derived from economic activities of both residents and non-residents in RS;
- profit derived from the sale of property located in RS and the sale of movable property if the sale is carried out within RS;
- dividends, profit shares and interest income;
- income from copyright and similar rights; and
- income from rent and services paid by residents or permanent establishments in RS;o capital gains on transfers of securities and shares in equity of residents or permanent establishments based in the RS.
The taxable base is the profit determined by adjusting the profit stated in the profit/loss statement, except in cases prescribed by the law. In order to harmonize provisions of the RS Profit Tax Law with the Profit Tax Law of the FBiH, interest income on bank deposits is no longer tax exempt. Amortization of goodwill is also a non-deductible expense.
According to the recent amendments, the annual withholding tax returns must be filed by 31 January of the current year for the previous tax year, instead of previously set date of 31 March. The gross amount of payments to non-residents, such as interest income, royalties, technical service fees, insurance premiums, payments for entertainment events, rental payments for movable property and fees for telecommunication services, are all taxed with withholding tax at a rate of 10%.
Considering thin capitalization, with effect from 2017, if a legal entity has taken out a loan from a related entity at an interest rate below the market interest rate, it may reduce its taxable base by deducting the amount of interest paid. Yet, the net interest expenses must not exceed 30% of the tax base.
The new amendments also bring several changes in terms of tax incentives, so there are no longer incentives related to new employment. However, taxpayers may reduce their tax liability by 30% if they invest in manufacturing equipment, real estate and plants the value of which exceeds 50% of their tax base in the current tax year.