Global Tax Alert | 10 July 2013

Vietnam-Serbia Income Tax Treaty ratified by Serbia

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On 3 June 2013, Serbia ratified their first income tax treaty (Treaty) with Vietnam. The Treaty which was signed on 1 March 2013 provides for withholding taxes of 10% and 15% for dividends and 10% for interest and royalties. Pending ratification by Vietnam, the Treaty is expected to enter into force in 2013 and become effective 1 January 2014.

This Alert highlights the key features of the Treaty.

Article 4, Resident

The definition of resident includes a tie breaker provision for both individuals and non-individuals. The latter is based on a place of effective management.

Article 5, Permanent Establishment (PE)

The Treaty provides that a service PE exists when services are provided for a period or periods aggregating more than six-months. It also provides that a dependent agent who has no authority to conclude contracts but habitually maintains a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the principal will be considered a PE. In addition, an exclusive agent is treated as a dependent agent. The Treaty also provides that an insurance entity that collects premiums or insures risks through a dependent agent (excluding reinsurance) constitutes a PE.

Articles 10-12, Withholding taxes on dividends, interest, and royaltes

If a company shareholder (not including a partnership) holds at least 25% of the capital of the payor company, a 10% withholding tax on dividends will apply. The rate is 15% in all other cases.

Withholding tax on interest is 10% in all cases. Withholding tax on royalties is 10%, including industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience.

Article 13, Gains

Exclusive resident country taxation is imposed if the gain is not derived from the alienation of immovable property, movable property as part the business property of a PE; alienation of ships or aircraft, or stock of a company whose property consists directly or indirectly principally of immovable property.

Article 16, Directors’ Fees

The Treaty provides for nonexclusive resident country taxation.

Article 22, Other Income

With respect to other income not covered by an individual article, there is exclusive resident country taxation if income arises anywhere. There is nonexclusive resident country taxation for income arising in that State.

Article 27, Entry into Force

The Treaty will enter into force on the date on which diplomatic notes indicating completion of ratification procedures are exchanged. With respect to withholding tax, the Treaty is effective on or after 1 January following the year in which the Treaty enters into force. For all other taxes, the Treaty applies to income derived in the calendar year following the year in which the Treaty enters into force.

Implications

The Treaty marks the first treaty between Vietnam and Serbia and will promote bilateral economic, trade and investment cooperation. Under Vietnam’s current domestic law, a distribution of dividend is not subject to withholding tax; accordingly, a Serbian resident can receive dividend distributions from Vietnam without any Vietnamese withholding tax, irrespective of a shareholder’s classification or a percentage of interest in a Vietnamese entity. In addition, investors in each country will benefit from the capital gains tax exemption when disposing of stock of an entity in the other country, provided that the stock does not substantially represent underlying immovable property.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Vietnam Limited, Ho Chi Minh City
  • Nhung Tran
    +84 4 3824 5252
    nhung.tran@vn.ey.com
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris Finnerty
    +1 212 773 7479
    chris.finnerty@ey.com
  • Jeff Hongo
    +1 212 773 6143
    jeff.hongo@ey.com
  • Kaz Parsch
    +1 212 773 7201
    kazuyo.parsch@ey.com
  • Bee-Khun Yap
    +1 212 773 1816
    bee-khun.yap@ey.com

EYG no. CM3629