Serbia is preparing its most substantial corporate tax reform in years, combining the gradual removal of domestic investment incentives with a future European Union framework designed to prevent multinational groups from shifting taxable profits across borders.
The proposed amendments to the Corporate Income Tax Law entered parliamentary procedure at the end of July. Although some provisions would apply from 1 January 2027 or 1 January 2028, the principal cross-border rules would become effective only when Serbia joins the EU.
That distinction is important. The legislation does not simply prevent foreign investors from transferring profits out of Serbia, nor does it prohibit the repatriation of legally earned dividends. Instead, it introduces a broader system covering excessive interest deductions, controlled foreign companies, corporate restructurings, dividends, royalties and transactions between related businesses.
The package would align Serbia with the EU’s Anti-Tax Avoidance Directive, Parent-Subsidiary Directive, Merger Directive and Interest and Royalties Directive. It would therefore make certain methods of tax-base erosion more difficult while simultaneously removing taxation from qualifying intra-EU payments and corporate reorganisations.
For multinational companies, the result is a more complex but recognisably European tax environment. Serbia would become less permissive towards structures that extract locally generated earnings through debt, passive-income entities or subsidiaries in low-tax jurisdictions. At the same time, genuine European corporate groups could obtain tax-neutral treatment for dividends, interest, royalties, mergers and asset transfers when the prescribed ownership, holding-period and economic-substance requirements are met.
The most consequential anti-avoidance provision is a new restriction on borrowing costs. Under the proposed rule, a company could deduct net financing expenses only up to 30 per cent of EBITDA or €3 million a year, whichever produces the larger deductible amount. Financing costs exceeding that threshold would increase the company’s taxable base, although unused amounts could be carried forward for three subsequent tax periods.
This represents a significant change for highly leveraged Serbian subsidiaries. Many foreign-owned businesses are financed through a combination of equity and shareholder or group loans. Interest paid to a parent company or affiliated financing entity reduces taxable profit in Serbia and moves cash to another jurisdiction. The new EBITDA test would restrict the tax benefit of that model when borrowing costs become disproportionate to the operating earnings generated by the Serbian business.
The measure will be especially relevant to capital-intensive sectors such as real estate, energy, telecommunications, infrastructure, manufacturing and private-equity-backed acquisitions. Project companies in these industries often carry substantial debt during construction and the early operating years, when EBITDA remains weak or volatile.
The rule does not prevent companies from borrowing, nor does it automatically reclassify interest payments as unlawful profit transfers. It changes the amount of financing cost that may be recognised for corporate tax purposes. A Serbian subsidiary may still pay contractual interest to its foreign lender, but the portion exceeding the statutory ceiling would no longer immediately reduce taxable income.
This distinction could materially affect financial models. Serbia’s headline corporate income tax rate remains 15 per cent, among the more competitive rates in Europe. Every €1 million of financing expenditure that loses tax deductibility could therefore increase current corporate tax by as much as €150,000, before considering carry-forward relief and other adjustments.
The impact on individual projects will depend on leverage, interest rates, EBITDA generation and the structure of shareholder financing. Mature industrial companies with strong operating cash flow may remain comfortably below the threshold. Development-stage businesses, leveraged acquisitions and assets with prolonged construction periods face greater exposure.
Serbia already has transfer-pricing rules, withholding taxes, thin-capitalisation provisions and treaties intended to prevent abusive or double taxation. The new system would replace parts of that framework with the EU’s EBITDA-based approach. Existing controls do not disappear simply because the most extensive new provisions are linked to accession. The Serbian Tax Administration can already challenge non-arm’s-length pricing, artificial service charges and interest arrangements that do not reflect commercial conditions.
A second major change concerns controlled foreign companies. The proposed CFC rules would require a Serbian resident company to include certain undistributed income of a foreign-controlled entity in its Serbian tax base when that entity is subject to substantially lower taxation abroad.
The measure targets passive income such as interest, royalties, dividends, financial income and other earnings that can be separated from the underlying operating activity. Its purpose is to prevent Serbian companies from retaining profits in entities established primarily to obtain a lower effective tax rate.
The proposal nevertheless preserves an economic-substance defence. A foreign subsidiary conducting genuine activity, with appropriate employees, assets, premises and commercial decision-making, should not be treated in the same way as a paper company created principally for tax purposes. That places greater weight on documented substance, beneficial ownership and evidence showing where management and value creation actually occur.
The EU-entry condition is therefore more than a political postponement. Some elements of the regime depend on reciprocal recognition, administrative cooperation and information exchange between tax authorities inside the single market. Serbia can adopt the legal provisions before accession, but it cannot fully reproduce the institutional environment in which the EU directives operate.
Still, the delay creates an unusually long and uncertain transition period. Serbia has been an EU candidate since 2012 and opened accession negotiations in 2014, but there is no fixed membership date. A law triggered solely by accession could remain inactive for years.
That does not mean the current package has no immediate consequences. The government is separately withdrawing several incentives on a defined timetable. From 1 January 2027, new investors would no longer be able to enter Serbia’s prominent ten-year corporate tax exemption for large investments.
Under the existing regime, a company can qualify for a proportional corporate tax holiday lasting up to ten years when it invests more than RSD 1 billion, approximately €8.5 million, in fixed assets and employs at least 100 additional workers on indefinite contracts.
Companies that obtain and properly report their entitlement by 31 December 2026 would retain the acquired benefit for the remaining statutory period. The proposal therefore creates a clear cut-off between existing beneficiaries and future investments.
Other incentives scheduled for removal include relief connected with concession arrangements, qualifying employment schemes and investments in innovative companies. Certain changes would apply from 2028, while the EU-dependent corporate provisions would wait until accession.
For investors, the disappearance of the large-investment exemption may be financially more immediate than the future anti-profit-shifting rules. A profitable manufacturing operation with taxable earnings of €10 million a year faces a standard annual corporate tax charge of €1.5 million at the current rate. Across ten years, the gross value of a full exemption could theoretically reach €15 million, although the actual benefit is proportional, conditional and dependent on investment and employment levels.
Serbia is therefore changing two parts of its investment proposition at once. It is narrowing tax incentives that have helped attract labour-intensive foreign direct investment while preparing stricter rules governing the way multinational groups finance subsidiaries and distribute earnings.
The policy shift reflects EU state-aid requirements as much as revenue collection. Serbia’s existing investment framework has combined tax holidays, employment subsidies, land, infrastructure support and direct budget incentives. Brussels’ accession methodology requires candidate countries to align such schemes with EU competition and state-aid rules, limiting selective advantages that can distort investment decisions.
Serbia will still be able to support investment, but future assistance is likely to require more disciplined design, greater transparency and clearer links to regional development, research, decarbonisation or other recognised policy objectives. The investment proposition will increasingly depend on productivity, infrastructure, workforce quality, energy availability and access to European supply chains rather than open-ended tax privileges.
The new framework also creates a less one-sided outcome than the language of preventing profit outflows might suggest. Qualifying dividends and profit distributions between Serbian companies and EU parent or subsidiary companies could receive tax-neutral treatment. Certain interest and royalty payments between associated companies could also be exempt from Serbian withholding tax.
The proposed conditions include minimum ownership thresholds and holding periods. Parliamentary documentation indicates thresholds of 10 per cent or 25 per cent, depending on the applicable payment and relationship, generally maintained for at least 24 months. Companies would also need to satisfy tax-residence, legal-form and documentation requirements.
Corporate mergers, divisions, partial divisions, asset transfers and share exchanges involving Serbian and EU companies could be completed without immediate taxation of qualifying capital gains. Hidden reserves would remain recorded, and the tax liability would generally be deferred rather than erased. Relief could be withdrawn where the transaction is primarily designed for tax avoidance or where the transferred business is disposed of within a specified period, including a proposed five-year safeguard in certain cases.
This architecture matters for future acquisitions and regional consolidation. A European industrial group could reorganise its Serbian assets without triggering an immediate tax charge, provided the operation has a genuine commercial rationale and the transferred activities remain connected to a Serbian permanent establishment where required.
The reform would consequently reward operating substance while making purely financial extraction structures less attractive. Groups relying on large shareholder loans, royalty-heavy arrangements or passive offshore entities will need more robust evidence. Companies with real production, staff, assets and decision-making functions should gain a clearer route to tax-neutral European restructuring after accession.
Banks and investors will have to incorporate the changes into financing documentation well before formal EU membership. Loan models should test whether projected interest remains deductible under the 30 per cent EBITDA ceiling. Shareholder-loan agreements will require benchmarking against market terms. Tax covenants may need to cover CFC exposure, beneficial ownership, permanent-establishment status and the possibility that deferred tax liabilities become payable following a disposal or restructuring.
The immediate investment question is more urgent. Projects that may qualify for Serbia’s existing large-investment tax holiday have only until the end of 2026 to establish and report the entitlement required to preserve acquired rights. That timetable is likely to accelerate decisions on fixed-asset deployment, employment commitments and the legal sequencing of investments already under development.
Serbia’s reform is not a capital-control mechanism, and foreign companies will remain entitled to distribute dividends and service legitimate debt. It is a transition from a relatively simple, incentive-led tax system towards a model in which the location of profit must more closely reflect the location of employees, assets, risk and economic activity. The most immediate cost is the approaching closure of established investment incentives; the deeper structural change will arrive with EU membership, when Serbia’s 15 per cent corporate tax regime becomes embedded in the bloc’s wider anti-avoidance and cross-border reorganisation framework.
