Slovenia and Croatia adopted the Minimum Tax Act (MTA). The MTA implements Directive (EU) 2022/2523 to ensure a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the EU. The latter is a consequence of the OECD’s global fight against tax base erosion within the scope of Pillar II.
The OECD’s Pillar II project represents an extraordinary milestone in international taxation as it is the first time that a minimum tax is being implemented on a global level. 135 countries have bound themselves to implement a minimum tax within the OECD, whereby the previously mentioned Directive enforces the minimum tax within the EU. The purpose of the minimum tax is to ensure a global minimum taxation of the profits of large international and domestic groups at an effective tax rate of 15% (the minimum tax rate). The MTA envisages that the minimum tax will have to be calculated and paid for tax periods after 31 December 2023. Entities will be required to submit their first 2024 domestic surtax returns and information forms within 18 months of the end of the 2024 calendar year, i.e. by 30 June 2026.
Liable taxpayers in Slovenia and Croatia
Only groups of multinational enterprises (MNEs) that have annual revenue in consolidated financial statements exceeding 750 M EUR in at least two of the four fiscal years preceding the tested financial year will be impacted by the minimum tax.
Each MNE group that fulfils the conditions for the purposes of the MTA will have to determine and calculate whether it is bound to pay the so-called “top-up tax” for each entity in its MNE group.
Minimum tax structure in Slovenia and Croatia
The minimum tax is composed of a top-up tax and a domestic top-up tax and is a separate system from corporate income tax, with complex rules for determining the base (qualifying income and excess profits) and the effective tax rate.
Determining all the elements required to calculate the top-up tax is a complex operation and entails:
- identifying entities within the MNE group and determining the threshold;
- calculating the qualified revenue or loss of entities in the MNE group in a specific jurisdiction;
- calculating qualified domestic taxes;
- calculating the effective tax rate for each tax jurisdiction in which the MNE group is present;
- if the effective tax rate is lower than the minimum tax rate, the top-up tax will be calculated for each jurisdiction.
All MNE group member entities that are part of consolidated financial reports will have to be considered. Moreover, entities that are excluded from consolidation due to their small size, on materiality grounds or on the grounds that they are held for sale, will also have to be considered.
Minimum tax implications for countries in the region:
- Serbia
Serbia has not implemented the minimum tax rules, but the fact that MNE groups, that fall under the Directive, can have entities in Serbia, can have an impact on Serbia as well. The corporate income tax rate in Serbia is aligned with the global minimum rate stipulated by the Directive – 15%. However, the effective tax rate in Serbia may fall below 15% due to the array of tax incentives available to taxpayers. The foremost incentive, established to entice foreign direct investment, is a 10-year tax exemption. This incentive exempts investors from paying corporate income tax for ten years, provided they invest a minimum of RSD 1 billion (approx. EUR 8.5 million) in fixed assets for manufacturing activities in Serbia and hire an additional 100 employees under indefinite-term contracts to bolster local manufacturing. Having this in mind, the corporate income tax incentives may lose their practical significance, which is to entice foreign direct investment by providing the said tax exemptions.
- Montenegro
Montenegro also has not implemented the minimum tax rules, but the rules can have an impact on Montenegro as well if MNE groups have entities in Montenegro. The corporate income tax rate in Montenegro is progressive: (i) for income up to EUR 100,000 tax rate is 9%, (ii) for income from EUR 100,000.01 to EUR 1,500,000 tax rate is 12% plus EUR 9,000, and (iii) for income higher than 1,500,000.01 tax rate is 15% plus amount of EUR 177,000. Additionally, a foremost incentive in Montenegro is a corporate income tax incentive for newly established legal entities conducting business activities in economically underdeveloped municipalities, which are entitled to an 8-year tax exemption. The maximum amount of tax exemption for the period of eight years is limited to EUR 200,000. Due to the progressive tax rates and an 8-year corporate income tax holiday, the effective tax rate in Montenegro may fall below 15%.
- North Macedonia
North Macedonia was among the jurisdictions which joined the OECD Statement on a Two–Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. However, as of now, it has not brought Pillar Two into law.
There is also no public information on whether the Government is working on the necessary legal amendments to implement Pillar Two. Note that presidential and parliamentary elections are scheduled in North Macedonia for April 2024 and May 2024. Therefore, it is likely that any possible changes concerning tax reform would wait for the formation of a new Government.
The corporate income tax rate in North Macedonia, which will likely be relevant for the determination of the minimum tax, is 10%. The basis for calculating the corporate tax is determined as the difference between the total income and the total expenses of the taxpayer in amounts determined in accordance with the accounting regulations and accounting standards. There are also state aid schemes in North Macedonia which provide corporate income tax exemptions.
Taking the above into account, the applicable corporate income tax for certain MNEs with a presence in North Macedonia will likely be affected by the Directive (EU) 2022/2523.
Since North Macedonia is in the process of aligning its legislation with the EU acquis and the fact that it joined a statement to implement Pillar Two into law, it is expected that North Macedonia will adopt a minimum tax law, similar to the MTA or make changes to existing tax legislation.
The information in this document does not constitute legal advice on any particular matter and is provided for general informational purposes only.
By Branimir Rajsic, Senior Consultant, Katarina Tomic, Senior Associate, and Milica Mijatovic, Associate, Karanovic & Partners