Loans granted by a founder to a company are considered related-party transactions within the meaning of the Corporate Income Tax Law.
If the agreement does not provide for interest, or if the agreed rate is lower than the market rate, the company may be required in its tax balance sheet to make an adjustment and recognize interest income calculated using the rates annually published by the Ministry of Finance in the Rulebook on arm’s-length interest rates.
Under Articles 59 to 61 of the Corporate Income Tax Law, all transactions between related parties must comply with the arm’s-length principle. If the terms differ from those that would be agreed between unrelated parties, the taxpayer must make the necessary adjustments in the tax balance sheet.
This means that even when no interest is agreed, a lender company may have to recognize deemed interest income using the prescribed arm’s-length rates, while the borrower may not automatically deduct an interest expense that was never actually charged.
Article 61, paragraph 3 provides that the Minister of Finance prescribes the interest rates deemed to be in line with the arm’s-length principle and used for determining interest income and expenses between related parties.
If a company, as borrower, receives an interest-free loan from its founder who is a related party, the company generally does not have an obligation to submit transfer pricing documentation solely because of that received gratuitous loan.
This position is additionally explained in the opinion of the Ministry of Finance of the Republic of Serbia No. 413-00-173/2016-04 of 18 July 2016.
In practice, where the founder holds 25% or more of the capital, the founder is treated as a related party. If the loan agreement expressly provides that no interest is charged or paid, the borrowing company itself does not prepare a transfer pricing report only on that basis. In such a situation, the obligation to analyze deemed interest may pass to the founder, but only if the founder determines the tax base through a tax balance sheet.
If a loan agreement between the company and its founder expressly states that interest is neither calculated nor paid, the company as borrower generally has no obligation to prepare transfer pricing documentation under Article 60, paragraph 3 of the Law solely because of that loan. In that case, the obligation to prepare documentation may lie with the founder, depending on the founder’s own tax status.
Loans granted by a founder to a company are considered related-party transactions within the meaning of the Corporate Income Tax Law.
If the agreement does not provide for interest, or if the agreed rate is lower than the market rate, the company may be required in its tax balance sheet to make an adjustment and recognize interest income calculated using the rates annually published by the Ministry of Finance in the Rulebook on arm’s-length interest rates.
Under Articles 59 to 61 of the Corporate Income Tax Law, all transactions between related parties must comply with the arm’s-length principle. If the terms differ from those that would be agreed between unrelated parties, the taxpayer must make the necessary adjustments in the tax balance sheet.
This means that even when no interest is agreed, a lender company may have to recognize deemed interest income using the prescribed arm’s-length rates, while the borrower may not automatically deduct an interest expense that was never actually charged.
Article 61, paragraph 3 provides that the Minister of Finance prescribes the interest rates deemed to be in line with the arm’s-length principle and used for determining interest income and expenses between related parties.
If a company, as borrower, receives an interest-free loan from its founder who is a related party, the company generally does not have an obligation to submit transfer pricing documentation solely because of that received gratuitous loan.
This position is additionally explained in the opinion of the Ministry of Finance of the Republic of Serbia No. 413-00-173/2016-04 of 18 July 2016.
In practice, where the founder holds 25% or more of the capital, the founder is treated as a related party. If the loan agreement expressly provides that no interest is charged or paid, the borrowing company itself does not prepare a transfer pricing report only on that basis. In such a situation, the obligation to analyze deemed interest may pass to the founder, but only if the founder determines the tax base through a tax balance sheet.
If a loan agreement between the company and its founder expressly states that interest is neither calculated nor paid, the company as borrower generally has no obligation to prepare transfer pricing documentation under Article 60, paragraph 3 of the Law solely because of that loan. In that case, the obligation to prepare documentation may lie with the founder, depending on the founder’s own tax status.
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