The application of the Act on Determining the Origin of Property and Special Tax (“Act”) started on March 12, 2021. Since the introduction of the bill, the Act has attracted a lot of attention, both from the professional public and others, not only because of the subject of regulation, but also because of its legal solutions. The Act came into force at the start of 2020, but its implementation was postponed for a year. In that period, amid criticism, some amendments were added to the Act, just before the start of its implementation.
It is noticeable that the intention of the lawmakers was for the Act to regulate two similar and related, but completely different, issues. The first issue is the determination of possible tax evasion, i.e. whether the assets of a certain natural person correspond to the income that that person earned in the previous period and presented through tax returns. The second issue concerns the collection of information and evidence through a tax audit for the purposes of possible criminal proceedings against a natural person for whom is proven that they obtained certain property by committing one or more criminal offenses. However, it seems that it was the decision of the legislators to remain focused only on the first issue, but the second issue was not completely excluded from the Act either.
Article 59 of the 2002 Act on Tax Procedure and Tax Administration (“Tax Act”) regulates the so-called cross-assessment of the tax base to determine the personal income tax base[1]. Therefore, the question of the suitability of passing a special law that would essentially regulate the same issue was justifiably raised in the professional public. The only, of course, significant difference between the Tax Act and the Act is in the special tax rate of 75% on undeclared income that the Act envisages. In all other respects, the Tax Act and/or the regulation determining another, also special type of tax, shall apply to the special procedure prescribed by the Act. The Act specifies that the provisions of the Tax Act regarding the statute of limitations for determining and collecting taxes remain out of enforcement. This provision is one of the most controversial, as it potentially opens the door to unlimited retroactive implementation of the Act.
After the amendments to the Act were adopted, the approach towards criminal legislation was reduced to the calculation of a special tax to avoid double taxation (jeopardy). Therefore, if the final verdict in a criminal procedure determines that certain assets were obtained via a criminal act, but that the special tax was paid in accordance with the Act, the court shall include the sum of the paid special tax in the sum of total assets gained through the criminal act. The same principle will also be used in proceedings related to the of confiscation of property designated as a proceed of crime[2].
The criminal scope of the Act was reduced after the amendments to the Act entered into force, but before the beginning of application. Certainly, the most obvious illustration of this trend was the replacement of the term “illegally acquired property” with the term “property on which a special tax is determined”, in order to avoid identification with property derived from a criminal offense.
However, it appears that this approach has not been consistently implemented. Namely, the text of the Act still retains the formulations that speak about the legality of acquiring property, although the subject of the Act is to determine whether there has been tax evasion and taxation with a special tax in that case.
Also, the term “expenditures for private needs of a natural person” was introduced, which influenced a change in the definition of the special tax base. It is comprised of expenses that a natural person had for private needs and serves to determine the origin of income that a natural person acquired but did not spend on obtaining property.
Before any remarks on the novelties the Act brings, it is necessary to understand certain terms. The term “property on which a special tax is determined” occupies the central place in the Act. Therefore, the main purpose of the Act is to determine whether there is “undeclared” property, to which a special tax can apply. The Act defines property (goods and rights, in Serbia and abroad) as the difference between: (i) the sum of increases in assets and expenditures for private needs of a natural person and (ii) declared income increased by the amount of non-taxable income in Serbia, freely acquired property, property acquired by borrowing, or in other lawful ways. Thus, the purpose of the Act is to determine whether the increase in property and / or private expenditures of a natural person exceeds the income that person has reported. If it exceeds EUR 150,000, a special tax will apply. The increase in assets is defined as a positive difference in the assets at the end of a set 3-year period, while expenditures that a natural person had for private purposes serve to avoid deceit of the Act provisions for persons who (intentionally) did not increase their assets but have used undeclared income in various other ways.
Notably, the very title of the Act (no longer) corresponds to the subject, bearing in mind that the Act shall not determine the origin of the property, nor the legality of how it came to be, but only whether it corresponds to the reported income where tax was duly paid. In a situation where this is not the case, the special tax will apply.
Therefore, on the one hand, the Act regulates the conditions, manner, and separate procedure in which the property of a natural person and its increase is determined. On the other hand, the Act introduces a special tax on the property increase which, as the Act states, a natural person cannot prove to have acquired legally[3]. The Act itself does not regulate how the the value of property and expenditures for private needs will be determined. This was regulated by a special Decree, adopted before the Act came into effect, which entered into force on March 17.
A special unit of the Tax Administration, ex officio or upon application / initiative, will initiate and conduct a separate procedure to analyze property, in pursuit of increases where a natural person cannot prove the “legality” of its origin as they exceed the income reported. In such a case the property in question will be subject to a special tax. The burden of proving the property increase in relation to the reported income is on the Tax Administration, and it is up to the natural person to prove the “legality” of how it was acquired for the part where the increase does not correspond to the reported income. When assessing the value of property, all assets belonging to a natural person will be considered[4]. The procedure consists of two phases.
In the previous procedure, which is carried out on the basis of risk analysis, the increase in the value of assets is determined on the basis of data available to the Tax Administration and collected by inspectors from other bodies and organizations, legal or natural persons. Then, the thus determined increase is compared to the reported income in the observed period. If it seems probable that within a maximum of three consecutive calendar years during which a natural person has seen an increase in the value of their property, there is a difference greater than EUR 150,000 the so-called control procedure will be initiated.
In the control procedure, the property subject to the special tax is determined by the Tax Administration. A natural person whose property is the subject of control has the right to participate in the control procedure and to submit evidence proving the “legality” of the property. Upon completion of the control, the special unit of the Tax Administration issues a decision determining the special tax if it establishes said discrepancies
As with any other tax, in this case we distinguish between the tax base and the tax rate.
The special tax base is determined by the value of the assets to which the special tax is applicable. It is the sum of the revalued worth of the property for each calendar year that was the subject of control. In essence, the tax base has been expanded by amendments to the Act to include the value of a natural person’s assets and the value of expenditures for private needs which combined exceed the declared income.
The special tax rate is 75%. The extremely high rate provided by the Act indicates that the goal of passing the Act, in addition to tax control and collecting special tax, is to punish natural persons by withholding 3/4 of their property. In practical terms, when it is determined that a natural person owns property or had expenses that are disproportionate to their reported income, three quarters of their assets will belong to the budget of the Republic of Serbia. Moreover, if the court finds that the natural person acquired the property unlawfully, the person will be deprived of all illegally acquired property.
The implementation of the Act must start somewhere. Hence, the Act stipulates that employees in the newly established Tax Administration unit are obliged to submit complete and accurate data on their property to the Anti-Corruption Agency before commencing work. Therefore, the first Serbian citizens “under attack” are precisely those who are supposed to apply it. This type of inspection will prove their suitability to perform such a delicate and responsible job.
After that, other citizens will be “under scrutiny” directly on the basis of the so-called risk analysis[5], which is not publicly available.
The Act has been in force for a month, so the first results are expected yet, which will determine its scope in more detail. The idea and aspiration of the law-maker are indisputable, however, sometimes it is not enough for the regulation to be effectively implemented. Not rarely, a strong will of all those who are in any way involved in the implementation is needed.
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[1] It is determined as the difference between the value of the assets at the end (31 December) and at the beginning (1 January) of the calendar year, from which the following is subtracted: (i) the amount of reported income; (ii) the value of property acquired by means of inheritance, gift or other lawful free-of-charge way; (iii) the amount of income subject to personal income tax, which is not included in the taxation of the annual personal income tax, for which appropriate material evidence is provided. The tax base determined in this way is undeclared income, which is taxed like other income, i.e. personal income tax is paid.
[2] See the Act on Confiscation of Criminal Proceeds.
[3] Although the wording “illegally acquired property” was removed from the Act, it seems that the legislator has not remained consistent in that respect, so this part also talks about the (illegal) acquisition of a natural person’s property.
[4] 1) immovable property (apartment, house, office building and premises, garage, land, etc.); 2) financial instruments; 3) shares in a legal entity; 4) equipment for performing independent activity; 5) motor vehicles, vessels and aircraft; 6) savings deposits and cash; 7) other property rights.
[5] The amendments deviated from the procedure based on the so-called annual tax guidelines that would not be public, and which should have been issued by the Director of the Tax Administration on the basis of risk analysis for the reasons, as stated, of avoiding unnecessary administration.
