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Serbia: Related-party interest rates for 2019, transfer pricing documentation implications

Serbia: Related-party interest rates for 2019

Serbian Ministry of Finance adopted the “rulebook” on arm’s length interest rates for 2019.

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The rulebook—published in the official gazette No. 13/2019 (28 February 2019) and effective through 31 December 2019—contains the prescribed interest rates applicable for taxpayers that had or will have related-party financing during 2019 and thus has transfer pricing implications.

Implications for transfer pricing documentation for 2019 and for income tax treaties

According to the provisions of Articles 59, 60 and 61 of Serbia’s corporate income tax law, in determining arm’s length interest expenses or revenue, taxpayers can:

  • Use interest rates as prescribed by the rulebook, or
  • Apply general OECD-based methods for assessment of arm’s length interest as prescribed by the income tax law

Taxpayers may elect to apply only one of these interest-rate options, and the interest-rate option elected must be consistently applied to all intercompany loans. Further. the prescribed interest rates must be applied to interest income and expense recognized during 2019 regardless of the period from which loan(s) originate.

The rulebook prescribes separate interest rates for long-term and for short-term borrowings for all non-finance entities and a single interest rate for banks and finance leasing companies (except for RSD-denominated loans when the interest rate is prescribed only for short-term loans).

In determining the amount of interest subject to beneficiary rates prescribed by an applicable income tax treaty, taxpayers may also use prescribed rates or apply general OECD-based methods. Unlike to the calculation of transfer pricing adjustments, taxpayers may apply prescribed rates and general methodology interchangeably in determining potential withholding tax exposure.

Arm’s length interest rates for 2019 from the rulebook

Read a table [PDF 105] prepared by the KPMG member firm in Serbia that lists the arm's length interest rates for loans or transactions in various currencies 

KPMG observation

In general, the rulebook reflects a trend of decreasing interest rates for other companies when compared to the interest rates for 2018, except for long-term financing in Serbian dinars for which a slight increase was recorded. On the other hand, in case of banks and financial leasing companies, the trend reflects increasing interest rates (except for financing in Swiss francs, Russian rubles, and short-term financing in Serbian dinars).

Taxpayers need to review if new interest rates for 2019 are aligned with interest rates currently used in their related-party financial instruments. In addition, companies exposed to significant, long-term related-party financing may want to consider applying general OECD based methods for assessment of arm’s length interest as prescribed by the income tax law in Serbia because this approach may be more beneficial and provide increased level of certainty in relation to future tax treatment.

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