An innovative startup from the point of view of tax regulations
There is more and more talk in the IT community about startup companies, their advantages, disadvantages and potential state aid. IT guild often defines a startup company as a high-tech company in the earliest period of development with the aspiration to implement new and big ideas on the market. However, from the point of view of tax regulations that are the subject of analysis, an innovative startup company means a newly established company with less than 3 years from the establishment, and which performs innovative activities – activities undertaken to create new products, technologies, processes and services or significant changes to existing ones, in line with market needs. In addition to the above, in order to be considered an innovative startup company, a newly established company must meet other requirements, such as:
1) annual income according to the latest financial reports does not exceed 500,000,000 RSD;
2) has not distributed dividends since its establishment and will not distribute them for a period of three years;
3) the center of business activities is located on the territory of Serbia;
4) did not result from a status change of another company;
5) research and development costs make up at least 15% of total expenditures; or highly qualified employees make up more than 80% of all employees; or is the owner or user of a deposited copyright work or patent that is directly related to the innovation activity it performs.
Innovative startup companies that are established by the end of 2021, can exercise the right to exemption from taxes and contributions for compulsory social security on the salaries of founders employed in that startup company, in accordance with the Law on Personal Income Tax and the Law on compulsory social security contributions. This tax relief can be realized for the salaries of the founders paid in the period of 36 months from the day when the innovative startup company was founded.
In order for an innovative startup company to be entitled to the said tax relief, it must not be affiliated with any legal entity and may not generate more than 30% of its total income from other persons considered affiliated with any founder of that innovative startup company.
The right to tax exemption will be exercised by the employer under the condition 1) that the natural person – founder, i.e. each of the founders, if there are more than one, has established an employment relationship with an innovative startup company, concluded an employment contract and is registered for compulsory social security; and 2) that in the period for which he/she exercises the right to exemption, the founder has at least 5% of shares or stakes in the innovative startup company. Therefore, these two conditions must be met cumulatively.
The stated tax exemption can be realized by the employed founder for a salary of up to 150,000.00 RSD. However, in case the employed founder has a salary higher than the stated amount, he/she will not completely lose the right to tax exemption, but it can be used on the basis of a part of the salary up to 150,000.00 RSD.
Bearing in mind that a full tax exemption and exemption from social security contributions for the amount of salary up to RSD 150,000.00 is envisaged, we point out a practical problem and inconsistency in the calculation of social insurance for an employed founder, which could be calculated on the basis of minimum monthly salary in Serbia.
Given that it often happens that one person establishes several startup companies in the same or different areas of innovation, the Law on Personal Income Tax prescribes that tax relief on the earnings of one founder cannot be applied in more than one newly established companies. In other words, if one person is the founder of several innovative startup companies, he/she can use tax benefits in only one of those companies.
As stated, the right to tax exemption is exercised by the employer under the condition that the natural person – the founder, or each of the founders, if there are more than one, has established an employment relationship… Therefore, the interpretation of this provision leads to the conclusion that this law does not prescribe the maximum number of founders who can exercise the right to tax exemption. This means that an innovative startup company can obtain tax relief for any founder who meets the requirements set out in this section, regardless of the number of founders.