The UK-Serbia bilateral tax treaty has been updated as a result of changes made under the OECD’s multilateral instrument (MLI) for inclusion into bilateral treaties of tax treaty related provisions from the recommendations on base erosion and profit shifting (BEPS). The MLI entered into force for the UK and Serbia from 1 October 2018.

The UK-Serbia treaty was originally signed on 6 November 1981 between the UK and Yugoslavia. A combined document has been published showing the changes to the treaty that the UK and Serbia have agreed should be made as a result of the application of the provisions of the MLI.

Preamble

The preamble to the Convention will now adopt text from the MLI stating that the agreement intends to eliminate double taxation with respect to the taxes covered by the agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including treaty shopping arrangements aiming to obtain treaty relief for the indirect benefit of residents of third jurisdictions).

Residence

In Article 4 (1) of the revised UK-Serbia agreement where a person other than an individual is a resident of both contracting states the competent authorities should try to determine by mutual agreement the contracting state of which the person is deemed to be a resident for treaty purposes, having regard to the place of effective management, the place where it is incorporated and other relevant factors.

Permanent establishment

The permanent establishment provisions are amended to clarify that the exceptions in Article 5 (3) of the agreement do not apply to a fixed place of business that is used or maintained by an enterprise if the same enterprise or a closely related enterprise carries on business activities at the same place or at another place in the same Contracting State and that place constitutes a permanent establishment for the enterprise or a closely related enterprise under Article 5;  or the overall activity resulting from the combination of the activities of two enterprises is not of a preparatory or auxiliary character, where they are part of a cohesive business operation.

For the purposes of the permanent establishment article a person is closely related to an enterprise if one has control of the other or both are under the control of the same persons or enterprises. A person is considered to be closely related to an enterprise if one possesses directly or indirectly more than 50% of the beneficial interest in the other or, in the case of a company, more than 50% of the aggregate vote and value of the company’s shares or of the beneficial equity interest in the company.

Corresponding adjustments

A paragraph providing for corresponding adjustments has been added to the article on associated enterprises.

Mutual Agreement Procedure

A second sentence has been added to the first paragraph of the article on the mutual agreement procedure (MAP) stating that the case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the agreement.

A second sentence is has been added to the second paragraph of the article stating that any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the contracting state. A sentence has been added to the third paragraph stating that the competent authorities may also consult together for the elimination of double taxation in cases not provided for in the agreement.

Prevention of treaty abuse

A principal purposes test has been inserted in a revised article on treaty abuse. A benefit will not be given under the agreement if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement resulting in a benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions.

Entry into force

The provisions of the MLI take effect in relation to the UK-Serbia agreement:

• for taxes withheld at source, from 1 January 2019;
• in the United Kingdom, from 1 April 2019 for corporation tax and from 6 April 2019 for income tax and capital gains tax; and
• with respect to all other taxes levied by Serbia, for taxes levied with respect to taxable periods beginning on or after 1 April 2019.