Serbia: Arm’s length interest rates for 2021

Serbia: Arm’s length interest rates for 2021

Ministry of Finance released a “rulebook” (as the regulations are referred to in Serbia) regarding the arm’s length interest rates for 2021. The rulebook was published in the official gazette on 19 March 2021 and is effective as of 27 March 2021.

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Implications for transfer pricing documentation for 2021

According to the provisions of Serbia’s income tax law, the rulebook is used in determining arm’s length interest expense and revenue. Specifically, for purposes of the arm’s length interest measures, taxpayers may:

  • Use interest rates as prescribed by the rulebook, or
  • Apply the general OECD-based methods for assessing the arm’s length interest

Taxpayers that apply one of the above-listed options must apply that interest rate consistently to all intercompany loans.

Moreover, the prescribed interest rates are to be applied to interest income and expense recognized during 2021 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 for which interest rate is prescribed separately for short-term and long-term loans).

TaxNewsFlash-Transfer Pricing

KPMG observation

Compared to 2020, the rulebook shows a general decline in interest rates under the “other companies” category. Concerning banks and financial leasing companies, a decrease in interest rates was recorded in case of short-term loans in RSD, loans in EUR and RUB, while interest rates on loans in GBP show no change from the rate for the previous year. Read TaxNewsFlash

Taxpayers need to review the new interest rates for 2021 to determine that their transactions are aligned with interest rates currently applied in related-party financial instruments. In addition, companies exposed to significant long-term related-party financing need to consider applying general OECD-based methods for assessment of arm’s length interest, as such an approach may be more beneficial and provide increased level of certainty in relation to future tax treatment.

Read a March 2021 report prepared by the KPMG member firm in Serbia

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