When considering business expansion into Serbia, one of the key tax-related questions is: Is it more tax-efficient to establish a limited liability company (LLC) or to operate through a branch of a foreign legal entity?
This decision is not purely a matter of legal formality—it carries significant tax implications. Understanding the differences between these legal structures is essential, particularly in the context of the Serbian Corporate Income Tax Law (CIT Law) and the Double Tax Treaty (DTT) between Serbia and other country. For clarity, this article refers to provisions and tax rates applicable under the Serbia–Poland DTT.
In this article, we provide a comparative tax analysis of LLCs and branches, focusing on critical aspects such as expense recognition, income taxation, withholding tax implications, and the treatment of profit repatriation. Our goal is to help Polish tax residents clearly understand which structure may be more tax-efficient and economically viable, based on their specific business context.
LLC vs. Branch from a Serbian Tax Law Perspective
According to the Serbian Company Law, a limited liability company (“LLC”) is a legal entity that carries out activities with the purpose of generating profit. As such, an LLC is subject to corporate income tax in accordance with the provisions of the Corporate Income Tax Law (CIT Law).
In contrast, a branch of a foreign legal entity is considered a separate organisational unit of the foreign company on the territory of Serbia. It operates in accordance with the law but does not have legal entity status. However, the branch has legal identity for tax purposes and is taxed as a legal entity under the CIT Law.
Corporate Profit Tax: Key Differences
Below are several specific provisions that distinguish the taxation of branches from LLCs in Serbia, particularly in terms of how taxable profit and deductible expenses are determined in the corporate tax return:
- Interest and related expenses on loans granted by the branch’s non-resident head office are not recognised as deductible in the branch’s tax return. In LLC those are recognised costs in tax balance.
- Royalties and intellectual property fees paid by the branch to its non-resident head office are also not deductible. In LLC those are recognised costs in tax balance.
Further, support service expenses incurred by the branch for the benefit of its non-resident head office are not deductible unless the branch also records related revenue from the same transactions.
Additionally, according to the DTT between Poland and Serbia, equipment lease payments to the head office are treated as royalty payments and more favorable WHT rate prescribed by the DTT can be used. On the other hand, it is important to note that lease payments made by a branch to its non-resident head office for the use of equipment are recognised as deductible expenses in the branch’s tax return. Therefore, mentioned cost are treated on the same manner in both legal entities.
Withholding Tax / Tax Assessment Obligations
According to the CIT Law and the Serbia–Poland DTT, withholding tax is applicable on income paid by a Serbian resident legal entity to a non-resident legal entity, including:
- Dividends and profit shares – 5% / 15% withholding tax (5% applies if ownership exceeds 25% and 15% in all other cases)
- Royalties and IP rights – 10%
- Interest – 10%
- Lease and sublease payments (real estate or movable property) – 20% for real estate; 10% for equipment leases treated as royalties
- Fees for market research services, accounting and auditing services, and other services in the field of legal and business consultancy, regardless of the place where such services are provided or used, or where they will be provided or used. [1]
However, these provisions do not apply to branches, given that branches do not have the status of a legal entity. The following applies to branches:
- If a non-resident company receives payments from its branch in Serbia for royalties, interest, or services, these payments are not subject to withholding tax or assessed tax.
- The repatriation of net profit from the branch to the foreign head office is not subject to withholding tax, since it does not constitute a dividend or profit share from a Serbian legal entity to a non-resident legal entity.
- If a branch pays rental fees (real estate or movable property) to its non-resident head office, assessed tax applies. Note: Although equipment lease payments are treated as royalties and taxed with favorable tax rate from DTT, assessed tax still applies in this context.
Practical Examples: Tax Optimisation – Branch vs. LLC
Example 1:
A Polish resident company is considering whether to establish a branch or an LLC in Serbia. The projected profit in Serbia is EUR 20,000,000. Under the Serbia–Poland DTT, the withholding tax on dividends is 5% (if ownership exceeds 25%). There are no planned intra-group transactions between the Polish entity and the Serbian entity.
| Legal entity | Taxable Income | Corporate Income Tax 15% | Profit available for distribution | Dividend Tax 5% | Total Tax burden |
|---|---|---|---|---|---|
| Option 1. – Branch office | 20,000,000 | 3,000,000 | 17,000,000 | – | 3,000,000 |
| Option 2. – LLC | 20,000,000 | 3,000,000 | 17,000,000 | 850,000 | 3,850,000 |
Implication:
If the company chooses the LLC model, profit repatriation (via dividends) would trigger a 5% withholding tax. In contrast, using a branch allows for tax-free profit repatriation, offering a potential tax advantage in this scenario.
Example 2:
A Polish resident company considers establishing either a branch or LLC in Serbia. The projected profit is in Serbia again EUR 20,000,000. In addition, the Polish entity plans to license software to the Serbian entity for an annual fee of EUR 5,000,000.
According to Serbian tax law, royalty payments made by a Serbian branch office to a non-resident are not tax-deductible from CIT base and those are increasing corporate tax base.
Further, if the Serbian entity is a branch, such royalty payments are not subject to withholding tax.
Under the Serbia–Poland DTT, the royalty tax rate is 10%.
| Legal entity | Taxable Income | Corporate Income Tax 15% | Withholding Tax 10% | Total Tax burden |
|---|---|---|---|---|
| Option 1. – Branch office | 25,000,000 | 3,750,000 | – | 3,750,000 |
| Option 2. – LLC | 20,000,000 | 3,000,000 | 500,000 | 3,500,000 |
Implication:
In this scenario, establishing an LLC may prove to be more tax-efficient, despite the fact that a branch would not be subject to withholding tax on the license fee. This is due to the fact that royalty payments are not recognised as deductible expenses in the branch’s tax return, while the applicable corporate income tax rate exceeds the withholding tax rate in this case.
Conclusion
The choice between a Serbian LLC and a branch of a foreign company can significantly impact your overall tax liability. Each structure comes with its own set of pros and cons, depending on your business model, the nature of intra-group transactions, and your long-term objectives.
For Polish companies considering entry into the Serbian market, understanding the tax treatment under both Serbian law and the Serbia–Poland Double Tax Treaty is key to making a sound, tax-efficient decision. A tailored analysis based on your business specifics is strongly recommended before choosing the optimal legal form for your Serbian operations.
If you’re planning such a step, feel free to reach out to our tax advisory team—we’re here to help you make the most strategic and tax-smart choice.
[1] In accordance with the provisions of the DTT, withholding tax does not apply to remuneration for services such as market research, accounting and auditing, as well as other services falling within the scope of legal and business consultancy
