Tax exemption for employees engaged in R&D activities

What is the tax exemption for employees engaged in R&D projects?

This is an incentive that applies to the salaries of employees directly involved in the implementation of R&D projects. The tax exemption grants the employer-legal entity (including a startup) the right to be exempted from paying 70% of salary tax and 100% of contributions for pension and disability insurance for employees engaged in direct research and development (R&D) activities, in proportion to the time they spend on R&D tasks against  the full-time employment.

Which startup is eligible for this incentive?

The condition for a startup to qualify for this incentive is that it is incorporated in Serbia and has conducted research and development (R&D) activities within the territory of Serbia. This condition will be considered fulfilled if at least 90% of all employees engaged in R&D activities carry out their work within the territory of Serbia. However, in exceptional cases, the project will be considered conducted within the territory of Serbia even if certain parts of the project are carried out outside of Serbia, provided that the relocation of R&D activities is caused by specific physical, geographical, or natural factors that can not be fulfilled within the territory of Serbia.

What is R&D?

R&D (Research and Development) refers to a project involving research and development activities. Research refers to any original or planned investigation undertaken to gain new scientific or technical knowledge and understanding. Development, on the other hand, involves the application of research findings or the utilization of other achievements or production design to create significantly improved materials, devices, products, processes, systems, or services prior to their commercial production or use.

Does the startup have to conduct R&D on its own behalf?

A startup can use this incentive for its employees only if it carries out R&D projects on its own behalf and becomes the owner of intellectual property that may arise through such activities. However, if the startup is engaged in contract research and development, conducting projects on behalf of another entity, it is not eligible to use this incentive for its employees.

Who is considered as an individual directly engaged in R&D projects?

An individual is considered directly engaged in R&D projects when they are directly involved in identifying and resolving relevant processes or technical issues or tasks associated with a specific project, such as developing software solutions. This individual must be employed by the startup, meaning they have entered into an employment contract, whether it is for a definite or indefinite term, and whether they work full-time or part-time. For this incentive, individuals who exercise direct or indirect supervision over project implementation or perform support activities related to project implementation can not be considered.

What documentation is required?

The startup is required to maintain documentation for each individual employee engaged in an R&D project that meets the criteria for utilizing this tax incentive. Some of the data that the documentation should include are as follows: information on the employee’s working hours, their full-time equivalent, the time they spent on R&D projects for that month, time taken for annual leave in that month, details related to their earnings, wage compensation, and other income.
Additionally, as an employer, the startup is also obliged to have specific documentation for each individual project, including:

• Project description highlighting objectives and planned phases
• Annual project budget
• Employee report for the individual engaged in the R&D project, including information on their working hours.

How is it utilized?

The startup utilizes this incentive by declaring the relevant information regarding the tax exemption it is utilizing in the individual tax return for taxes and contributions on the PPP-PD form (Individual Tax Return on Calculated Taxes and Contributions).

What are the limitations in the application of this incentive?

The exemption does not apply to salaries paid to employees engaged in research activities related to the exploration and development of oil, gas, or mineral reserves in the extractive industry.
The startup will not be able to apply this incentive for its employees if it already benefits from any other type of incentive related to the employment of those same individuals within the startup.

Can a startup simultaneously benefit from another incentive – double R&D deduction?

The startup can utilize this incentive for the salaries of individuals directly engaged in R&D projects when it comes to personal income tax. However, for corporate income tax purposes, the startup can simultaneously declare the salaries of these individuals – directly engaged in R&D projects – at double the amount in the tax balance sheet. It is important to note that in this situation, the startup can include not only the salaries of directly engaged individuals as expenses but also those who exercise direct and indirect supervision over project implementation.

The regulations governing this incentive are as follows: 

• The Law on Personal Income Tax, Article 21i.
• The Law on Contributions for Mandatory Social Insurance, Article 45z.
• The Regulation on the Conditions and Procedures for Exercising the Right to Tax Exemption Based on the Salaries of Employees Engaged in Research and Development.

Example:

The startup “Aurora” is conducting research and development to develop software for selling various products. “Aurora” has fifteen employees, out of which ten are engaged in R&D projects. Nine out of the ten employees are conducting research and development projects in Serbia, while one employee is involved in a part of the project conducted abroad. Three employees are directly engaged in the implementation of the project, such as creating new software solutions, while the others are involved in directly supervising the project implementation or providing support to other employees engaged in research and development.
“Aurora” is eligible to use this incentive only for the salaries of individuals directly engaged in the R&D project. The condition that R&D is conducted in Serbia is fulfilled, as at least 90% of all employees engaged in the R&D project carry out their activities in Serbia. Out of the three employees, they spend part of their working time directly involved in the implementation of the R&D project, while the remaining part of their working time is dedicated to other tasks within the startup. “Aurora” is entitled to tax exemption for the salaries of these employees, proportionate to the time they spend on the R&D project. One of the three employees took annual leave during that month, so that time can not be considered as time spent on direct engagement in R&D activities. Startup “Aurora” is required to keep individual records for all three employees and submit a separate tax return for each employee, providing the necessary information to determine the eligibility for this incentive. By doing so, “Aurora” manages to exempt 70% of salary tax and 100% of contributions for pension and disability insurance for those employees, effectively reducing its operating costs while enabling the employees to have higher earnings.