Tax exemption for startup founders

The tax exemption for startup founders who are also employed by the startup allows for a reduction in the startup’s operating costs, which consist in exemption from paying taxes on the salaries and mandatory social security contributions of those employed founders. For a startup, this exemption is of great importance in the early years of operation, as they are faced with high labor costs during that time.

What is the tax exemption for startup founders?
The tax exemption applies against taxes on salaries and applicable social security contributions of founders who are also employed in the startup. This benefit allows the employer (startup) to exempt those taxes on salaries and social security contributions for the founders for a period of 36 months from the date the startup was incorporated. The exemption is available to startups regardless of when they were incorporated, but it is only applicable for a period of 36 months from the date of incorporation. Since the exemption from payment also applies to social security contributions, these will be paid from the budget of Serbia based on the lowest monthly contribution basis.

Who is qualified for this relief?
The relief applies to each founder based on their monthly salary, provided that the monthly salary is not higher than 150,000 dinars (gross salary, including tax and social security contributions). If the salary is higher than 150,000 dinars, the relief is applied only to the portion of the salary up to 150,000 dinars, while taxes and contributions are paid on the portion above that amount.

What conditions must be met?

In order for the tax relief to be applied to the founder’s salary, additional conditions must be met:

• The founder must be employed in the startup, have a signed employment contract, and be registered for mandatory social security contributions;
• The employed founder must possess at least 5% of the shares or equity in the startup during the period of the tax relief;
• The startup must not have related legal entities, meaning that there are no other legal entities that can exert significant influence or control over the business decisions of the startup through the possession of a certain percentage of shares or equity in the startup;
• The startup must not generate more than 30% of its total revenue from other persons related to any founder of the startup (for example, if the startup is doing business with the founder’s spouse, the condition is that the startup does not generate revenues greater than 30% of its total revenue from that business).

What if one person founds multiple startups?

If a founder of a startup that uses this incentive appears as a founder of other startups, this incentive can not be applied to their income as a founder in those other startups.

Can the startup use other incentives for its founder?

If a startup uses this incentive for its founder, it is not entitled to use other incentives for that person, including subsidies for employment and self-employment.

How is this incentive used?

No prior confirmation from any authority is required for the application of this incentive. If the conditions prescribed by law are met, the startup can apply this tax exemption by submitting a tax return for taxes and contributions on salaries on the PPP-PD form (individual tax return on calculated taxes and contributions), entering the appropriate revenue type code 3.6 in the form.

Which regulations govern this relief?
Income Tax Law, Article 21e
Law on Contributions for Compulsory Social Insurance, Article 45d

Example:
Andrija and Masha founded the startup “Aurora” on January 1, 2022, and each own a 20% stake in the startup. They have signed an employment contract with “Aurora” and are registered for compulsory social security. Andrija’s gross monthly salary is 140,000 dinars, while Masha’s salary is 170,000 dinars. They meet the conditions for applying tax exemption for a period of 36 months from the founding of the startup. “Aurora” is exempt from paying taxes and contributions for compulsory social insurance, but when it comes to Masha’s salary, only the amount up to 150,000 dinars is exempted, while the amount above 150,000 dinars is subject to tax and contributions. However, Andrija lost part of his stake on January 1, 2023, and it now amounts to 3%. Therefore, he no longer has the right to this relief, and from that moment on, taxes and contributions will be paid on his salary. In the meantime, Masha has founded another startup, but she will not be able to apply this exemption to that second startup, as “Aurora” is already using this relief. “Aurora” has significantly facilitated its business operations by reducing labor costs through the use of this exemption for its founders.