Serbian Ministry of Finance Clarifies – No Withholding Tax on Payments on a Notional Principal under Interest Rate Swaps

Serbian Ministry of Finance Clarifies – No Withholding Tax on Payments on a Notional Principal under Interest Rate Swaps

Author: Tijana Kojovic, BDK Advokati

The Serbian Ministry of Finance has finally reversed its own 2007 opinion which incorrectly held that gross payments on a notional amount under an interest rate swap agreement between a Serbian resident and a non-resident are subject to withholding tax on interest. This opinion was obviously wrong as it overlooked the economic essence of the payments under interest rate swaps. Even though it was not binding on the tax authorities, it did create a considerable amount of legal uncertainty in the past 12 years.

In its Opinion no. 430-00-493/2019-04 dated 25 September 2019, the Ministry of Finance rectified the uncertainty created by its earlier opinion. It now says that “when an interest rate swap is concluded for the purpose of hedging against the risk interest rate fluctuations, and not for the purpose of financing” (which is always the case), the payments under such arrangement are not considered interest and are not subject to withholding tax.

There was another opinion of the Ministry of Finance, issued in 2009, holding that a premium payable to a non-resident for an option designed to hedge interest rate risk, is subject to a withholding tax at the rate of 20% as if it were an interest payment. The logic of the latest Ministry of Finance opinion, clarifying that withholding tax on interest does not apply to payments which are not interest on financing, equally applies to the 2009 opinion on the taxation of premium on interest-related options, so we may now consider the latter as obsolete.

Author: Tijana Kojovic, BDK Advokati

The Serbian Ministry of Finance has finally reversed its own 2007 opinion which incorrectly held that gross payments on a notional amount under an interest rate swap agreement between a Serbian resident and a non-resident are subject to withholding tax on interest. This opinion was obviously wrong as it overlooked the economic essence of the payments under interest rate swaps. Even though it was not binding on the tax authorities, it did create a considerable amount of legal uncertainty in the past 12 years.

In its Opinion no. 430-00-493/2019-04 dated 25 September 2019, the Ministry of Finance rectified the uncertainty created by its earlier opinion. It now says that “when an interest rate swap is concluded for the purpose of hedging against the risk interest rate fluctuations, and not for the purpose of financing” (which is always the case), the payments under such arrangement are not considered interest and are not subject to withholding tax.

There was another opinion of the Ministry of Finance, issued in 2009, holding that a premium payable to a non-resident for an option designed to hedge interest rate risk, is subject to a withholding tax at the rate of 20% as if it were an interest payment. The logic of the latest Ministry of Finance opinion, clarifying that withholding tax on interest does not apply to payments which are not interest on financing, equally applies to the 2009 opinion on the taxation of premium on interest-related options, so we may now consider the latter as obsolete.