Tax incentives related to companies investing in startups

This incentive aims to encourage direct investment in the capital of startups by the companies. As startups face financing challenges in their early years of operation, one way to stimulate potential investors is by introducing incentives that reduce the taxable profit of investors if they make investments.

What does this tax incentive consist of?

The incentive consists in the right of a company that invests in the capital of an innovative company, i.e., a startup, to receive a tax credit of 30% of such an  investment.

What conditions must companies meet to benefit from this incentive?

A company is eligible for the tax credit if: 

• It is not an innovative startup; 
• Prior to the investment, either individually or together with all related parties*, it did not own more than 25% of the shares or stocks, or voting rights in the startup’s governing bodies (if the investor, the company itself or together with its subsidiary company, did not hold more than 25% ownership stake at any point prior to the investment); 
• It has fully paid the monetary contributions; 
• It has not continuously reduced its investment for a period of three years from the date of the investment. 

*A party related to a taxpayer is defined as a natural or legal person in whose relationships there is a possibility of control or significant influence over business decisions through the ownership of a certain percentage of shares or equity.

When can a company utilize this incentive?

The investing company can utilize the tax credit in the first tax period following the period in which the condition of non-reduction of investment is fulfilled. This means that it is entitled to the tax credit at the end of three years from the date of the investment (the calculation of the period begins on the last day of the tax period in which the investment was made). For example, if the investor fully completes the investment in 2023, it will have the right to use the tax credit in relation to the corporate tax determined for the year 2027.

What if the investor does not fully utilize the tax credit amount?

If the investor does not fully utilize the tax credit amount, the unused portion can be carried forward to future tax periods, but not exceeding a period of 5 years.

What are the limitations regarding the amount of the tax credit?

• The maximum amount of tax credit granted to an individual investor for investment in a single startup is 100,000,000 Serbian dinars. If a company, together with its related parties, has invested in the same startup, the maximum total tax credit amount for all related parties combined is 100,000,000 Serbian dinars. 
• The maximum amount of tax credit, regardless of the number of investments, in a single tax year is 50,000,000 Serbian dinars.

What are the requirements for an innovative startup to fulfill?

An innovative startup must meet the following conditions:

• It is a company that has been established for no more than 3 years; 
• It primarily engages in innovative activities, which involve creating new products, technologies, processes, and services, or making significant modifications to existing ones in accordance with market needs; 
• Its annual revenue, based on the latest financial statements, does not exceed 500,000,000 Serbian dinars; 
• It has not distributed dividends or profits since its incorporation and will not distribute them for a period of 3 years from the date of investment. 
• Its center of business activities is located within the territory of Serbia;
• It was not incorporated by way of a corporate reorganization (statusne promene);
• From the second year of its incorporation until the investment is made by the investor, it must fulfill one of the following three conditions:
• Research and development (R&D) expenses account for at least 15% of total expenses, or 
• Highly qualified employees make up more than 80% of the total workforce, or 
• The startup is the owner or user of a deposited copyright or patent directly related to its innovative activities.

How is this incentive used?

The corporate entity investor needs to: 

• Along with the tax return (PDP form) and electronic tax balance sheet, submit the UID Form – Declaration of Investment in Innovative Activities and the UID1 Form – Declaration of Compliance by the Startup for the year in which the investment was made. 
• After fulfilling the prescribed conditions, for the subsequent tax period, submit the UID2 Form – Declaration of Compliance by the Startup and the PK 5 Form – Tax Credit for Investment in Startup Capital, along with the tax balance sheet and tax return, electronically. The UID2 Form must be submitted after meeting the prescribed conditions, and the corporate entity investor has an obligation to submit it regardless of whether they will use the tax credit for that tax period or not.

Regulations governing this tax incentive are as follows: 

• Corporate Income Tax Law, Article 50j
• Regulation on the conditions and procedures for obtaining the right to tax credit for investment in the capital of newly established corporate entities engaged in innovative activities.

Example:
The startup “Aurora” develops software for selling various products and was founded on January 1, 2022. To secure additional funding, two investors, the corporate entities “Kle” and “Miro,” who are related parties, come forward. Investor “Kle” makes an investment of 200,000,000 dinars and fully pays the monetary contributions to the startup “Aurora” in May 2022. “Kle” will be eligible to use a tax credit for the tax calculated for the year 2026, provided that it does not reduce its investment continuously for a period of 3 years from the date of investment. “Kle” is entitled to a tax credit of 60,000,000 dinars for the tax year 2026, but since there is a limit on the amount of credit for one year, it will be eligible for a tax credit of 50,000,000 dinars. In the year 2022 when the investment was made, “Kle” submits the completed UID Form and UID1 Form electronically along with the tax return and tax balance sheet. For the tax year 2026, for which it is entitled to use the tax credit, “Kle” submits the UID2 Form and PK5 Form along with the tax return and tax balance sheet. Investor “Miro,” a related party of “Kle,” makes an investment of 300,000,000 dinars in the startup “Aurora” in 2023 and fully pays the monetary contributions in May 2023. The “Miro” will be eligible to use a tax credit for the tax calculated for the year 2027, which amounts to 30% of the investment, totaling 90,000,000 dinars. Since “Kle” has already been eligible for a credit of 50,000,000 dinars, and considering that “Kle” and “Miro” are related parties with a limit on the amount of tax credit based on investment in one startup, which is 100,000,000 dinars, it follows that “Miro” is entitled to a tax credit of 50,000,000 dinars. Miro submits the same documentation as investor “Kle.”
By utilizing the tax credit, the corporate entities are able to reduce their taxable profits.