Crypto in Serbia: Legal Framework
In today’s digital age, crypto and other forms of digital assets have become one of the most common topics worldwide. Digital assets, relying on blockchain technology, bring about a revolution in the way we conduct business, invest, and think about money. Besides offering a decentralized and secure platform for financial transactions, crypto represent a symbol of technological advancement and innovation. Despite the challenges and uncertainties associated with this new form of assets, it is undisputed that crypto have a significant impact on the global financial market and will continue to shape the way we conduct business in the future.
Digital assets in Serbia are regulated by the Digital Assets Act, which was enacted in December 2020 and came into force on June 29, 2021. This area is also regulated by a series of secondary regulations issued by the National Bank of Serbia (NBS) and the Securities Commission.
The Digital Assets Act defines digital assets as a special type of property – a digital record of value that can be digitally bought, sold, exchanged, or transferred and can be used as a medium of exchange or for investment purposes, regardless of the technology on which it is based (blockchain or other).
The law expressly states that digital assets do not include digital records of currencies that are legal tender or other financial assets regulated by other laws. Therefore, the law makes a clear distinction between digital assets and money. Digital assets are not considered currency or a means of payment (although colloquially referred to as cryptocurrency). This way of defining digital assets has multiple implications from legal and tax perspectives.
The law divides digital assets into two categories: crypto currencies (virtual currencies) and digital tokens.
Cryptocurrency is a type of digital asset not issued by and not guaranteed by a central bank or other public authority. Cryptocurrency does not have the legal status of money or currency, but individuals or legal entities accept it as a medium of exchange and can buy, sell, exchange, transfer, and store it electronically (examples of cryptocurrencies include Bitcoin, Ethereum, USDT, etc.).
A digital token is another type of digital asset. A digital token may grant its holder various rights, including access to certain services or products, the right to a portion of profits or assets, the right to vote on a specific issue, ownership of digital resources, etc. Digital tokens also include NFTs, which are used to represent unique digital goods such as digital artworks, videos, or virtual items.
Authority over matters related to decision-making in administrative proceedings, issuing secondary regulations, supervising the performance of duties, and exercising other rights and obligations is divided between the NBS and the Securities Commission, depending on whether it concerns cryptocurrencies or digital tokens.
Services Related to Digital Assets
The Digital Assets Act extensively defines the services related to digital assets. Services related to digital assets include:
- Receipt, transfer, and execution of orders related to the buying and selling of digital assets on behalf of third parties;
- Services of buying and selling digital assets for cash and/or funds in an account and/or electronic money;
- Services of exchanging digital assets for other digital assets;
- Custody and administration of digital assets on behalf of digital asset users and related services;
- Services related to the issuance, offer, and sale of digital assets, with or without the obligation of repurchase (sponsorship) or without this obligation (agency);
- Maintenance of a register of security rights on digital assets;
- Services of acceptance/transmission of digital assets;
- Portfolio management of digital assets;
- Organization of a trading platform for digital assets.
A provider of services related to digital assets is authorized to provide these services only after obtaining a license from the supervisory authority. In addition to services related to digital assets, a service provider may only engage in activities and services directly related to them. The exception applies to legal entities holding a license from the Securities Commission to perform the activities of a brokerage-dealer company or market organizer, which may also obtain a license to provide services related to digital assets.
The process of obtaining a license is carried out by the NBS and the Securities Commission. A decision on the license application must be made within 60 days from the date of submission. In case the competent authority rejects the application, the applicant may submit a new application only after the expiration of one year.
The law also stipulates that financial institutions under the supervision of the National Bank of Serbia (banks, insurance companies, financial leasing companies, management companies of voluntary pension funds, payment institutions, etc.) cannot hold digital assets in their assets, nor can investments in the capital of these institutions be in digital assets. Financial institutions are also prohibited from providing services related to digital assets or being users of such services.
Taxation of Digital Assets – Legal Entities
Corporate Income Tax
Legal entities are required to pay capital gains tax on the difference between the acquisition and selling price of digital assets. The acquisition price of digital assets is considered the price documented by the obligor as actually paid. In accordance with the provisions of the Corporate Income Tax Act, realized capital gains are included in taxable income, subject to corporate income tax.
In the case of acquiring digital assets through mining, the acquisition cost represents the amount of expenses incurred by the obligor related to the acquisition of digital assets, as recorded in the business books.
The obligor is exempt from paying tax if they have a permit to provide services related to digital assets and acquired digital assets solely for further sale within the scope of their business activities.
The Corporate Income Tax Act also provides a tax relief for those legal entities who invest proceeds from the sale of digital assets into the share capital of a resident entity or investment fund in the Republic of Serbia. In this case, capital gains realized from the sale of digital assets are not included in the tax base. For other ways legal entities can reduce corporate income tax, read our article analyzing tax optimization for IT companies.
Value Added Tax (VAT)
The Value Added Tax Act explicitly stipulates that VAT is not payable on the transfer of cryptocurrencies or the exchange of cryptocurrencies for cash.
When it comes to digital tokens, the situation is more complex, and each specific case needs to be analyzed separately. In practice, there is a wide variety of practices and interpretations by tax authorities, so it is recommended to obtain the opinion of the Ministry of Finance on the obligation to calculate and pay VAT in each specific case.
The tax treatment of the transfer of digital tokens primarily depends on the economic essence of the specific digital token. Therefore, since digital tokens can have different purposes in terms of the rights of their holders, digital tokens can be divided into three main groups:
- Digital tokens whose transfer can acquire specific goods or services without guarantees from the issuer of the digital token and without the right to claim against the issuer of the digital token – no obligation to calculate VAT;
- Digital tokens whose transfer can acquire specific goods or services with this right established on the day of issuance of the digital token, and the specific token has elements of a voucher in accordance with the VAT Act (e.g., NFT tokens) – VAT is calculated;
- Digital tokens whose transfer can realize certain rights from the issuer of the token (e.g., the right to receive principal, the right to receive interest, the right to a percentage share of profits, etc.) – no VAT is calculate
Taxation of Digital Assets – Individuals
Capital Gains Tax
In accordance with the Personal Income Tax Act, digital assets are subject to capital gains tax. Taxpayers subject to capital gains tax are individuals who have realized a positive difference between the acquisition and selling price of digital assets. The acquisition price of digital assets is the price documented by the taxpayer as the actual purchase price.
Therefore, anyone who has purchased digital assets at a price lower than the selling price is obliged to pay capital gains tax, which amounts to 15% of the realized price difference. In the case of a negative difference between the purchase and selling price, this represents a capital loss, which can be offset against capital gains that the taxpayer can make in the next 5 years.
When it comes to mining digital assets by individuals, there is also an obligation to pay capital gains tax. Therefore, the tax liability does not arise at the time of acquiring digital assets but only at the time of their sale. In the case of mining, the acquisition cost will be considered the amount of expenses incurred by the taxpayer related to the acquisition of digital assets through mining, which can be documented (e.g., purchase of mining equipment, electricity costs, etc.).
A significant legal solution is also tax exemption for taxpayers who, within 90 days from the date of sale, invest proceeds from the sale of digital assets into the share capital of a resident legal entity in the Republic of Serbia, or into the capital of an investment fund in the Republic of Serbia. In this way, taxpayers are exempt from the obligation to pay 50% of the capital gains tax.
Capital gains tax is not payable by the taxpayer who disposes of digital assets held for more than 10 years.
Inheritance and Gift Tax
In the case of donation or inheritance of digital assets, inheritance and gift tax is payable, amounting to 2.5% of the market value of digital assets.
If the testator and heir, or donor and donee, are in the first hereditary line, this tax obligation does not apply.
In a situation where the testator and heir, or donor and donee, are in the second hereditary line, the tax rate is 1.5%.
Legal Entities and Entrepreneurs Embracing Digital Assets
Crypto cannot be injected as equity into a company; instead, it can be converted (exchanged) for fiat money and deposited as monetary equity into the company.
Non-monetary contributions to a company can be in digital tokens, only if the digital tokens do not pertain to the provision of services or execution of work. An exception exists in the case of non-monetary contributions to a partnership or limited partnership.
The NBS maintains records with data on legal entities and entrepreneurs who are users of crypto. In the event that legal entities and entrepreneurs use services provided by providers of services related to virtual currencies, the providers of these services submit the data to the NBS. If legal entities and entrepreneurs acquire crypto through other means, they are obligated to independently provide the NBS with the necessary data, through the data exchange center.
Leveraging Digital Tokens for Capital Acquisition
The capital market in Serbia is underdeveloped, and segments of this market that constitute the backbone of development in capitalist economies, such as the corporate bond market or stock exchange, are still marginal. The economy is largely financed through bank loans and own funds. However, financing through bank loans is not possible for certain companies, primarily for newly established start-up companies.
Some of the basic reasons for the low representation of financing of companies through financial instruments (stocks, bonds, options, futures, and other derivative financial instruments) are the complexity and high costs of the process of their issuance. The capital-raising procedure can be quite complex, involving various steps such as preparing the issuer’s prospectus, obtaining approval from regulatory bodies, as well as promoting and placing financial instruments on the capital market.
The Digital Assets Act provides the possibility of raising capital through issuing digital tokens. This method of raising capital is much simpler, more efficient, and cheaper than raising capital through financial instruments. If the conditions prescribed by the law are met, only the provisions of the Digital Assets Act apply to the process of issuing digital tokens, not the provisions of the Capital Market Act. Thus, the regulatory body, the Securities Commission, does not participate in the entire process.
In fact, to avoid the application of the Capital Market Act, it is necessary for the digital token not to have the characteristics of a financial instrument. However, even in the case where the digital token has the characteristics of a financial instrument, only the provisions of the Digital Assets Act apply to its issuance, provided that:
- the digital asset does not have the characteristics of shares;
- the digital asset is not convertible into shares;
- the total value of digital assets issued by one issuer during a period of 12 months does not exceed €3,000,000.
This legal possibility is very convenient for developing markets, such as the market of the Republic of Serbia. The threshold of €3,000,000 is set quite high, considering the needs of domestic micro and small legal entities, primarily start-up companies. Additionally, the law does not prescribe mandatory characteristics of the digital token, thus granting the issuer broad autonomy to express their creativity when forming tokens and the rights they offer to investors.
White Paper
The white paper is a document published during the issuance of digital assets, containing information about the issuer of the digital asset, the digital asset itself, and the risks associated with the digital asset, enabling investors to make informed investment decisions.
The white paper is approved by the regulatory body, either the NBS or the Securities Commission. Approval of the publication of the white paper does not mean that the regulatory body has approved the purpose of issuing the digital asset or confirmed the financial and technical information presented.
After the competent authority approves the white paper, the issuer publishes it without delay. Issuing digital assets and trading digital assets on the secondary market are allowed regardless of whether a white paper has been prepared and/or approved for it.
However, an initial offering of digital assets for which a white paper has not been approved cannot be advertised, except in exceptional cases prescribed by law. Also, it is reasonable to expect less trust from investors and weaker interest in digital assets for which a white paper has not been approved and published.
