How to Reduce Income Tax Based on Investments in Innovations?

Taxes are a mandatory category, but there are ways of reducing them through the implementation of proscribed tax exemptions. It can be an important stimulation for business operations and investments. That is why the state, in order to stimulate investments in innovations, has implemented facilities which enable taxpayers to reduce the amount of the income tax based on these investments, says the company Aktiva Sistem.

Double recognition of research and development costs in tax balances

This tax incentive is defined by Article 22g of the Law on the Corporate Income Tax.

The taxpayers are given the option to recognize all the costs related to the research and development activities in the double amount in their tax balances, which means that they are recognized two times, namely:

– as an expenditure that is recognized in the Success Balance in line with the accounting regulations;
– as a tax incentive, which is expressed as a separate item in the tax balances, which will have the character of an item deductible from the principal amount of the income tax.

The condition for acquiring the right to this tax incentive is for the research and development project to be done in the Republic of Serbia. In concrete terms, this means that at least 90% of all the employees working on research and development carry out their activities in the territory of the Republic of Serbia.

IP Box tax facility

The IP Box regime is a tax facility that is envisaged by Article 25b of the Law on the Corporate Income Tax and entails the right of the taxpayer, that is, the startup, to exclude the “qualified income” from the principal amount of the income tax (the taxable income) in the amount of 80% of the income realized that way. In simple terms, the income tax thereby comes down from 15% to 3%.

The right to this facility is given to a startup which is the carrier of the copyright or a related right and which realizes the income based on licensing the copyrighted work or a work protected under a related right. As copyrighted works are a result of the carried out research and development (R&D), the startup has to have carried out the R&D in the territory of Serbia.

In order for the startup to be able to use this facility, it has to deposit the copyrighted work, that is, to submit an application to the Institute for Public Property. This is especially important for IT companies which develop their own products, because software is considered an intellectual property which can be protected.

Investing in a startup

An investor which invests in the capital of a newly founded business entity which carries out innovation activities (a startup) can reduce its tax obligation based on a tax credit in the amount of 30% of the investment made (Article 50j of the Law on the Corporate Income Tax).

The aim of this tax incentive is to stimulate capital owners to invest in a startup, considering that one of the main characteristics of a startup is precisely the lack of capital.

At the moment of making the investment, the investor must not have more than 25% of the shares or the stake, that is, the votes in the managing organs of the startup in whose capital it is investing. The monetary investment by which the capital of the startup is increased must be fully paid.

The tax credit can be used in the first next tax period which follows the period in which the condition is met whereby the investor has not reduced its investment over a constant period of three years from the last day of the tax period in which the investment was made.

The tax credit cannot be higher than RSD 100,000,000 in total, that is, RSD 50,000,000 per tax year.