Opportunities in Serbia

POLITICAL CONTEXT

Serbia was one of six republics that made up the country of Yugoslavia, which broke up in the 1990s. In Feb. 2003, Serbia and Montenegro were the remaining two republics of rump Yugoslavia, forming a loose federation. In 2006, Montenegro split from Serbia. In December 2009, Serbia applied to join the EU. The Serbian parliament apologized for the massacre of Bosnian Serbs at Srebrenica in a landmark March 2010 resolution. Delaying Serbia’s request for EU membership was the fact that two major war crimes suspects were still at large. However, the arrest of former Bosnian Serb military commander Ratko Mladic and Serb leader Goran Hadzic in 2011 eliminated the last remaining roadblocks to Serbia’s path to EU admittance, and in March 2012 the EU declared Serbia a membership candidate. Mladic’s war crimes trial opened at the Hague opened in May 2012.

The EU cleared Serbia for membership talks in April 2013 after Serbia and Kosovo normalized relations in a groundbreaking deal in which Serbia acknowledged that Kosovo’s government has control over all of Kosovo, and Kosovo in turn granted autonomy to the Serbian-dominated north. Serbia stopped short of recognizing Kosovo’s independence, however.

The Government formed after the April 2016 elections stepped up the implementation of structural reforms, broadening the focus to include social sector transformation. Although the result of the spring 2017 presidential elections necessitated a change in prime minister (as the incumbent became Serbia’s new president), the Government experienced only minor changes, enabling it to maintain the emphasis on reforming the state administration, public finances, and the economy, along with pursuing the EU accession process.

ECONOMIC OVERVIEW

Serbia has a transitional economy largely dominated by market forces, but the state sector remains significant in certain areas. The economy relies on manufacturing and exports, driven largely by foreign investment. MILOSEVIC-era mismanagement of the economy, an extended period of international economic sanctions, civil war, and the damage to Yugoslavia’s infrastructure and industry during the NATO airstrikes in 1999 left the economy worse off than it was in 1990. In 2015, Serbia’s GDP was 27.5% below where it was in 1989.

Although the Serbian economy grew by 2.8% in 2016, growth slowed substantially in the first half of 2017. A long and severe winter impacted the energy and construction sectors, while the recent drought led to a major decline in agriculture output (which could be as much as 15% lower than in 2016). Labor market performance reflected real sector developments, with unemployment edging up only slightly in the first half of 2017 compared to the end of 2016 to reach 13.2%.

A decline in agriculture output in 2017 is likely to have adverse impacts on rural poverty and slow the pace of poverty reduction overall.

TOWARD STABILITY

The Government’s fiscal consolidation program, introduced in 2014, has contributed to a significant improvement in recent fiscal performance. The general government deficit was 1.4% of GDP in 2016, down from 6.6% in 2014, stemming primarily from increased revenues and expenditure control, with major savings from wage and pension reforms.

The World Bank program continues to support the Government’s implementation of complex structural reforms, with a focus on changing the role and size of the state and on policies to stimulate entrepreneurship and attract more investment.

Growth is expected to be driven by increased investment, stimulated by reforms to improve the business climate, and by the recovery of consumption (as the fiscal consolidation program gradually expires). Growth is expected to be around 3–4% over the medium term.

TAX REGIME

One of the key attractions of Serbian market is certainly favorable and business-friendly tax regime. Corporate profit tax is still among the lowest in Europe, while Value Added Tax is among the most competitive in Central and Eastern Europe.

Corporate Taxation

Tax	Rate	Recurrence	Possible Incentive
Corporate Profit Tax	15%	yearly	10 year tax holiday (investments in fixed assets over EUR 9 million and minimum 200 new jobs) & 20% or 40% of investment value as tax credit
Withholding Tax (for dividends, royalties, interest income, lease payments for movable or immovable property)	20%	yearly	lower rate according to Double Taxation Agreement

 

Individual Taxation

Tax	Rate	Recurrence	Possible Incentive
VAT	20% – standard 8% – lower	monthly	import VAT return for export of finished goods import VAT exempt in free trade zones

Serbian residents are taxed on their worldwide income; non-residents are taxed only on income generated in Serbia. For income tax purposes, an individual is considered resident if he/she has a residence or center of business or stays in Serbia for at least 183 days in the total during the tax year.

Tax	Rate	Recurrence	Possible Incentive
Salary Tax	10%	monthly	3 – year holiday for hiring apprentices 2 – year holiday for hiring unemployed workers
Annual Income Tax	10% – 3x-6x average salary 15% – over 6x average salary	yearly

 

The principal taxable forms of income are employment income (10%), business income (10%), royalties and rent, (20%) and capital gains (15%). Residents receiving income of 3 or more times the annual average earnings in the tax year are subject to annual income tax under the worldwide system.

Total costs for employers stand at merely 50% of the level in EU countries from Eastern Europe. Social insurance charges and Salary Tax amount to roughly 65% of the net salary but the tax burden for employers can be reduced through a variety of financial and tax incentives available.

Non-taxable income threshold is RSD 11,000 (app. EUR 96).

Double Taxation Relief

Double Taxation Agreements (DTA) Signed by Serbia
Albania	Bulgaria	DPR Korea	Ghana*	India	Latvia	Moldova	Poland	Spain	Ukraine
Austria	Canada	Denmark	Georgia	Indonesia*	Libya	Montenegro	Qatar	Sri Lanka	UAE*
Azerbaijan	China	Egypt	Germany	Italy	Lithuania	Netherlands	Romania	Sweden	UK
Belgium	Croatia	Estonia	Greece	Iran	Macedonia	Norway	Russia	Switzerland	Zimbabwe*
Belorussia	Cyprus	Finland	Guinea*	Ireland	Malaysia	Pakistan	Slovakia	Tunisia*
Bosnia & Herzegovina	Czech Republic	France	Hungary	Kuwait	Malta	Philippines*	Slovenia	Turkey

*Signed, to be confirmed by Parliament

DTA’s with Botswana, Vietnam, Zambia, Armenia, Jordan, South Africa and Morocco are initialled, while negotiations are under way with Luxembourg, North Korea, Myanmar Union, Nigeria and Syria.

 

WHY SHOULD YOU INVEST IN SERBIA

Innovation & Technology Transfer Support

Innovation and entrepreneurship are at the very core of economic growth. Serbia is producing high-quality engineers and researchers, but they are often engaged in work with limited impact on the economy. Closer collaboration between Serbia’s public research and development (R&D) sector and industry is needed in order to unleash its potential to the overall economic benefit of the country. To foster closer links between R&D and industry in Serbia, the World Bank is working with the Innovation Fund under a project financed by the EU: the Serbia Research, Innovation and Technology Transfer Project

The project facilitates the commercialization of scientific research results in Serbia through two types of support.

The subprojects financed through the Collaborative Grant Scheme (CGS) epitomize the market-driven model of collaboration between public R&D entities and the private sector—a key factor in EU-funded programs. So far, 14 such projects have received  financial support in the total amount of €3 million within the CGS program.

The Technology Transfer Facility (TTF) stimulates the transfer of public research to industry. It provides opportunities for innovative researchers by identifying research with commercial potential, connecting such opportunities with markets and prospective commercialization partners. So far, nine projects have been backed with over €125,000.

 

Belgrade Venture Forum

Recently Prime Minister Ana Brnabic opened the biggest investment, innovation and entrepreneurship forum in Belgrade “Belgrade Venture Forum”, and on this occasion said that the goal of the government is that the Serbian economy is based on innovations in order to have a sustainable and dynamic growth.

Brnabic told the gathering, featuring 30 innovative entrepreneurs from more than ten countries, who will present their ideas to over 50 investors, that Serbian economic development is now based on investments in science and research, but also that innovations and digitization are very important.

 

Cooperation with China

Serbia is the county in which China is implementing the largest number of projects in infrastructure and energy.

According to Antic, Minister of Energy and Mining,  the first phase related to the revitalisation of blocks B1 and B2, worth approximately $300 million, has been completed at the Kostolac Thermal Power Plant.

The second phase is underway and it involves the increase of production of coal from Drmno mine from 9 to 12 million tons a year and the construction of a new 350 MW power plant.

Electricity and gas interconnection

At the moment, Serbia has three serious interconnections that are in the process of construction or consideration. It is an electricity connection with Romania, a gas interconnection with Bulgaria, and continuation of the joint plans for the gas interconnection with Romania.