Any German business that establishes a company seat in Serbia, sets up a subsidiary or permanent establishment there or relocates parts of its operations to Serbia must address a number of key tax issues under German law and under the double taxation treaty. These questions differ fundamentally from a private emigration to Serbia: the focus is not on the entrepreneur’s residence but on the allocation of profits, the place of management, the taxation of distributions and the question of whether Germany continues to tax via the German Foreign Tax Act (Außensteuergesetz, AStG).
Setting up or relocating to Serbia affects three levels: Serbian company and tax law, which must be examined by an adviser licensed in Serbia, German foreign tax law (Außensteuerrecht), and the double taxation treaty as the connecting element. The legal position is as at September 2026.
Legal Basis: The Continuing 1987 Treaty with Yugoslavia
A separate double taxation treaty concluded after Serbia’s independence has not yet entered into force. The treaty between the Federal Republic of Germany and the Socialist Federal Republic of Yugoslavia of 26 March 1987 for the avoidance of double taxation with respect to taxes on income and capital (treaty text Federal Law Gazette, BGBl., 1988 II p. 745) continues to apply. The continued application of this treaty in relation to today’s Republic of Serbia was agreed and published in BGBl. 1997 II p. 961; the Federal Ministry of Finance lists it as continuing to apply in its overview of the status of double taxation treaties (most recently as at 1 January 2026).
A new treaty intended to replace the 1987 text was initialled on 27 June 2025. However, it has neither been signed nor entered into force. Until then, the old treaty remains decisive. This has practical consequences: although the text is based on the OECD Model Tax Convention in its structure, it deviates from it in the numbering of the articles and in individual provisions. As soon as the new treaty enters into force, existing structures must be reviewed again.
Serbian Law: What Must Be Clarified Locally in Advance
In practice, German investors in Serbia usually set up a corporation in the legal form of a d.o.o., which is comparable to the German GmbH. For German tax purposes, it is as a rule treated as a corporation (comparison of legal types, Rechtstypenvergleich); it is therefore a separate taxable entity whose profits only reach the German shareholder when distributed. Formation requirements, capital, registration, VAT and social security are governed by Serbian law; a Serbian adviser should be consulted on this.
The standard Serbian corporate income tax rate is 15 percent; there are also special regimes, such as preferential taxation of income from intellectual property. Details, including withholding tax and VAT, must be clarified with the Serbian adviser. What matters most on the German side is the actual tax burden on the respective income, because controlled foreign company taxation (CFC rules; Hinzurechnungsbesteuerung) depends on it.
Whether a German GmbH can transfer its registered office abroad while preserving its identity or whether a new formation is preferable is a question that affects every relocation abroad in the same way. The company law basics (real seat theory, incorporation theory, new formation or transfer) are set out in our article on relocating a GmbH abroad and apply accordingly to Serbia.
Permanent Establishment in Serbia: Exemption Only with Proof of Activity
If a German business does not maintain its own company in Serbia but a branch, an office or a manufacturing facility, there is as a rule a permanent establishment within the meaning of Art. 5 of the treaty. The requirement is a fixed place of business through which the business of the enterprise is wholly or partly carried on; a dependent agent with authority to conclude contracts may also be sufficient. The domestic concept of a permanent establishment under Section 12 of the German Fiscal Code (Abgabenordnung, AO) is broader, but in treaty cases it is overridden by the narrower concept in Art. 5 of the treaty. Serbia may tax the profits of the permanent establishment under Art. 7 of the treaty.
The decisive question is how Germany treats these profits. The 1987 treaty does not provide for an unrestricted exemption. Under Art. 24 (1) (a) and (c) of the treaty, Germany only exempts permanent establishment profits if it is proven that the permanent establishment’s receipts derive exclusively or almost exclusively from the production or sale of goods or merchandise, technical advice or technical services. Without this proof, the Serbian tax is merely credited against German tax. The profits then remain taxable in Germany, and the difference between the Serbian and the German tax burden is subject to additional tax in Germany.
In addition, there are two domestic provisions that take precedence over the treaty. Under Section 20 (2) AStG, the exemption is replaced by the credit method if the permanent establishment’s income would be taxable as passive income (Zwischeneinkünfte) if the permanent establishment were a foreign company, i.e. in the case of passive, low-taxed income. Section 50d (9) of the German Income Tax Act (Einkommensteuergesetz, EStG) excludes the exemption if the income is not taxed, or is taxed only at a reduced rate, in Serbia because the treaty is applied differently. Anyone planning a Serbian permanent establishment should therefore document in advance which activities are actually carried out there and how the receipts are made up.
For bookkeeping purposes, the results of the Serbian permanent establishment must be incorporated into the accounts of the German business. For the allocation of profits between head office and permanent establishment, an auxiliary and ancillary calculation (Hilfs- und Nebenrechnung) must be kept under the German Permanent Establishment Profit Allocation Ordinance (Betriebsstättengewinnaufteilungsverordnung, BsGaV). The basic requirements for a permanent establishment structure that will be recognised do not differ from those for other relocations abroad; they are set out for all legal forms in our article on moving a company’s registered office abroad.
Subsidiary or Permanent Establishment: The Structural Decision
Whether a Serbian subsidiary or a permanent establishment without separate legal personality is more suitable depends on the business model, the need to limit liability and the type of income. The following overview shows the most important differences from a German perspective:
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| Criterion | Subsidiary (d.o.o.) | Permanent establishment |
|---|---|---|
| Liability | In principle limited to the company’s assets | The German head office is directly liable |
| Taxable entity | Separate taxable entity in Serbia | Part of the German business without separate legal personality |
| German taxation of profits | Only on distribution, subject to controlled foreign company taxation | Exemption only with proof of activity under Art. 24 of the treaty, otherwise credit |
| Transfer of profits to Germany | Via dividends (Serbian withholding tax; check limitation under the treaty) | Ongoing attribution as part of the overall determination of profits |
| Transfer pricing | Arm’s length principle under Section 1 AStG for all business relationships | Profit allocation under the Authorised OECD Approach (BsGaV) |
| German notification obligation | Section 138 (2) nos. 3 and 4 AO | Section 138 (2) no. 1 AO |
For operating units with a permanent, independent business activity, such as a development or production unit, a subsidiary may be more suitable because of the limitation of liability and the clearer allocation for tax purposes; the company law side must be coordinated with a Serbian adviser. Freelancers and sole proprietors who relocate their activity in whole or in part face their own questions, which are covered in our article on business relocation abroad for freelancers.
Dividends: A Peculiarity of the Old Treaty
The 1987 treaty is asymmetrical with regard to dividends. According to its wording, Art. 11 only limits German withholding tax on dividends paid by a German company to persons resident in Serbia to 15 percent. For distributions by Serbian companies to German shareholders, Art. 8 contains a special rule for “profits from investments in a Yugoslav organisation of associated labour”, also with a limit of 15 percent. How this provision, which dates from the era of the Yugoslav economic system, is applied to a present-day d.o.o. should be clarified with the Serbian side in advance. As Serbia is not an EU Member State, the Parent-Subsidiary Directive does not apply; a distribution free of withholding tax under EU law is therefore ruled out.
Place of Management: When the Serbian Company Remains Taxable in Germany
A major source of error lies not in Serbian but in German law. Under Section 1 (1) of the German Corporation Tax Act (Körperschaftsteuergesetz, KStG), a corporation has unlimited tax liability in Germany if it has its registered office (Section 11 AO) or its place of management (Geschäftsleitung, Section 10 AO) in Germany. The place of management is the centre of top-level management, i.e. the place where the decisions of some importance that are decisive for the day-to-day management are actually taken.
A company registered in Serbia whose business is in fact still managed from Germany therefore has unlimited tax liability in Germany under Section 1 (1) KStG. This applies, for example, if only a registered address or a nominee managing director is maintained in Serbia while the German shareholder takes all key decisions. How the Serbian tax authorities classify such a company must be examined by an adviser there. If it has unlimited tax liability in both states, the tie-breaker rule in Art. 4 (3) of the treaty decides: for treaty purposes, the company is deemed to be resident in the state in which its place of effective management is located, i.e. in Germany. The intended tax advantage is then lost, and there is a risk of back tax claims including interest for past years.
Example: Markus runs a software development GmbH in Bavaria and sets up a d.o.o. in Serbia that is to take over development contracts from the German GmbH. The managing director of the d.o.o. is a local acquaintance who signs contracts but does not take any decisions of his own; Markus sets prices, staffing and contracts by email from Munich. During a tax audit, the tax office establishes that the place of management of the d.o.o. is in Germany. The company is therefore subject to unlimited corporation tax liability in Germany; trade tax (Gewerbesteuer) liability may also arise. Had Markus actually located the decision-making powers in Serbia and documented this on an ongoing basis, the starting position would have been different.
A mere registered address without economic substance, i.e. without staff, office premises and independent decision-making on site, is as a rule not recognised under treaty law or German law as a sound basis for shifting the right to tax. In the event of a dispute, minutes, travel records and the actual communication of the management are the most important evidence.
Relocation from Germany: Exit Taxation and Movement of Goods
If assets or entire functions are relocated from Germany to Serbia, the question of exit taxation (Entstrickung) arises. If Germany loses the right to tax an asset, for example because it is allocated to a Serbian permanent establishment, this is treated as a withdrawal or sale at fair market value under Section 4 (1) sentence 3 EStG and Section 12 (1) KStG; the hidden reserves are realised. The option of spreading the gain over five years via a compensating item (Ausgleichsposten) under Section 4g EStG is only available in favour of EU Member States and EEA states (Section 4g (1) in conjunction with Section 36 (5) sentence 1 EStG). It is ruled out for Serbia as a third country. Details on valuation and the legal basis are given in our article on exit taxation of business assets.
If a German corporation transfers its place of management to Serbia, it is deemed to be resident there for treaty purposes under Art. 4 (3) of the treaty. Insofar as Germany thereby loses the right to tax individual assets because they can no longer be allocated to a German permanent establishment, this is treated as a sale at fair market value under Section 12 (1) KStG. The former deemed liquidation rule in Section 12 (3) KStG has no longer applied since 2022; if a German permanent establishment remains, its assets are not subject to exit taxation.
For VAT purposes: as Serbia is not an EU Member State, moving goods or capital assets from Germany is not an intra-Community transfer under Section 3 (1a) of the German VAT Act (Umsatzsteuergesetz, UStG) but an export with customs and import VAT consequences in Serbia.
Transfer Pricing and Documentation Requirements
As soon as a Serbian subsidiary is integrated into a German group of companies, the arm’s length principle under Section 1 AStG applies to all business relationships. Supplies, services, licences, loans and the provision of staff must be priced as independent third parties would have agreed under comparable circumstances. In the case of a permanent establishment, profit allocation under the Authorised OECD Approach, as specified in the BsGaV, takes the place of contractual charging: personnel functions, assets, opportunities, risks and an appropriate amount of endowment capital are allocated to the permanent establishment.
Under Section 90 (3) AO, businesses with cross-border business relationships with related parties must prepare records of the nature and content of these relationships and of the appropriateness of the transfer prices. An additional master file is only required from a turnover of 100 million euros; smaller businesses benefit from simplifications. On request, the records must be submitted within 30 days (Section 90 (4) AO). If they are missing or unusable, estimates and surcharges under Section 162 (4) AO may be imposed.
As Serbian corporate income tax is below the overall German tax burden, businesses should expect tax auditors to look particularly closely at the allocation of functions and risks. This applies above all if high value-adding functions such as development, sales management or licence exploitation are formally allocated to the Serbian company, while actual decision-making power remains in Germany. The tax authorities can correct an allocation that is not at arm’s length, resulting in an increase in profits for the German company.
Controlled Foreign Company Taxation: When Serbia Counts as a Low-Tax Country
For structures with a Serbian subsidiary, the question of controlled foreign company taxation under Sections 7 to 13 AStG also arises. It applies if a person with unlimited tax liability in Germany, alone or together with related parties, controls the foreign company (more than 50 percent), the company earns passive income and this income is low-taxed. In the course of implementing the global minimum tax, the low-tax threshold in Section 8 (5) AStG was lowered from 25 to 15 percent; income is low-taxed if the burden on it is less than 15 percent. The consequence of attribution is that the passive income is attributed pro rata to the German shareholder as his or her own income, even if nothing has been distributed.
The standard Serbian corporate income tax rate of 15 percent is at the threshold, not below it. What matters, however, is the actual burden on the income as determined under German tax law (Section 8 (5) in conjunction with Section 10 (3) AStG). If the Serbian tax base differs or tax incentives are granted, the burden may fall below 15 percent; taxes that are owed but not collected do not count. This must be examined separately for each type of income.
This is particularly relevant for licence and software income, for which Serbia grants incentives. If such income is taxed in Serbia at well below 15 percent, it is in principle passive. Under Section 8 (1) no. 6 (a) AStG, licence income is only active if the company exploits the results of its own research and development carried out without the involvement of the German shareholder or persons related to him or her; this must be proven. A substance test under Section 8 (2) AStG, on the other hand, is not possible, because under Section 8 (3) AStG it is only available to companies in the EU or the EEA. Serbia is not such a state. Anyone who wants to use a Serbian company as a licensing or holding company should be familiar with the principles of a holding structure before emigration and their limits. The level of the Serbian tax burden must in any case be confirmed by an adviser there.
Licence Payments to Serbia: The Former Licence Barrier in Section 4j EStG
In addition to controlled foreign company taxation, until recently the licence barrier (Lizenzschranke) in Section 4j EStG also had to be examined for licence payments by a German company to a related Serbian company, irrespective of whether the requirements of Sections 7 et seq. AStG were met. It restricted the deduction as business expenses of expenditure for the licensing of rights if the recipient was a related party within the meaning of Section 1 (2) AStG and the income was subject to a preferential regime with a burden of less than 25 percent in the recipient’s hands. The non-deductible portion was then the difference between 25 percent and the actual burden, divided by 25 percent. Preferential regimes that comply with the so-called OECD nexus approach, i.e. that link the incentive to the recipient’s own research and development activity, were exempt.
Serbia grants such an incentive for certain intellectual property rights registered in Serbia: up to 80 percent of qualifying income can be excluded from the tax base, which mathematically results in a burden of around 3 percent. According to international tax advisory firms, the regime is aligned with the nexus approach. Whether it met the nexus exception in the individual case had to be proven separately; the details of the Serbian regime must be clarified with an adviser there.
Important in practice: the German legislature repealed Section 4j EStG with the Act to Amend the Minimum Tax Act and Implement Further Measures (Gesetz zur Anpassung des Mindeststeuergesetzes und zur Umsetzung weiterer Maßnahmen) of 22 December 2025 (BGBl. 2025 I No. 353). Under Section 52 (8c) EStG, the provision applies for the last time to the 2024 assessment period. It therefore no longer plays a role for new structures; for assessment periods up to 2024 that are still open, for example in an ongoing tax audit, it remains relevant. Irrespective of this, licence payments to Serbia must still be measured against the arm’s length principle under Section 1 AStG, and the licence income of the Serbian company may be subject to controlled foreign company taxation.
Unclear legal position: obtain a binding ruling. Where the tax assessment in Germany is not certain or may foreseeably change, an application for a binding ruling (verbindliche Auskunft) from the tax office (Section 89 (2) AO) should precede implementation. The ruling binds the tax office to the assessment given for a precisely defined set of facts that has not yet been implemented, and a fee is charged for it. If the tax adviser does not recommend this in such a situation, in our view he or she is acting irresponsibly: the client risks having to litigate over the outcome years later, and that costs time and money.
Notification and Reporting Obligations in Germany
Setting up or relocating to Serbia triggers separate notification obligations in Germany. Under Section 138 (2) AO, the following must be notified: the establishment or acquisition of a permanent establishment in Serbia (no. 1), the acquisition of a shareholding in the Serbian company of 10 percent or more or where the acquisition costs of all foreign shareholdings exceed EUR 150,000 (no. 3), and gaining a controlling or decisive influence for the first time over a company outside the EU and EFTA (no. 4). The notification must be made with the tax return, at the latest 14 months after the end of the tax period (Section 138 (5) AO).
Conversely, if a Serbian company establishes a permanent establishment in Germany for the first time, the tax office requires a tax registration questionnaire (Section 138 (1b) AO); a trade registration (Gewerbeanmeldung) is also generally required. If a German permanent establishment is given up entirely, the trade must be deregistered; if permanent establishments remain at several German locations, the apportionment of trade tax under Sections 28 et seq. of the German Trade Tax Act (Gewerbesteuergesetz, GewStG) changes. The registration and filing obligations in Serbia (register, tax, social security) are governed by Serbian law and must be coordinated with an adviser there.
Checklist: Structuring a Company Seat in Serbia Cleanly for Tax Purposes
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| Step | Content |
|---|---|
| 1. Structural decision | Choose between subsidiary and permanent establishment according to liability, substance and type of income |
| 2. Serbian law | Coordinate formation, registration and Serbian taxes with a Serbian adviser |
| 3. Treaty position | Apply the 1987 treaty, monitor the status of the new treaty (initialled on 27 June 2025) |
| 4. Place of management | Ensure and document actual decision-making on site (Section 1 (1) KStG, Section 10 AO) |
| 5. Permanent establishment | Prepare proof of activity under Art. 24 of the treaty; check Section 20 (2) AStG and Section 50d (9) EStG |
| 6. Exit taxation | Determine hidden reserves when transferring assets; no compensating item under Section 4g EStG; Section 12 (1) KStG also applies on transfer of the place of management |
| 7. Movement of goods | Clarify export, customs and import VAT; have Serbian registration obligations checked there |
| 8. Transfer pricing | Implement the arm’s length principle (Section 1 AStG) and documentation (Section 90 (3) AO) |
| 9. Controlled foreign company taxation | Compare type of income and actual burden per type of income with Section 8 (5) AStG; for open years up to 2024, check the licence barrier (Section 4j EStG, former version) |
| 10. Notification obligations | Section 138 (2) nos. 1, 3 and 4 AO; trade deregistration or change of registration |
Conclusion
Where a company seat or permanent establishment is located in Serbia, it is above all German law that decides whether the desired allocation for tax purposes holds. The basis is the continuing 1987 treaty, which only exempts permanent establishment profits where active business is proven and takes its own approach to dividends. If the place of management is in fact in Germany, the Serbian company remains subject to unlimited tax liability here. In addition, there is exit taxation without the relief available for EU and EEA states, transfer pricing and controlled foreign company taxation, for which a substance test is ruled out for Serbia. Early planning coordinated with advisers in Serbia reduces the risk of double taxation and back tax claims.
Frequently Asked Questions
Is there a double taxation treaty between Germany and Serbia?
Yes, the treaty with Yugoslavia of 26 March 1987 continues to apply in relation to Serbia (BGBl. 1988 II p. 745; continued application published in BGBl. 1997 II p. 961). A new treaty was initialled on 27 June 2025 but has not yet entered into force. Until then, the 1987 text remains decisive.
Does Germany exempt the profits of a Serbian permanent establishment from tax?
Only under certain conditions. Under Art. 24 of the treaty, the exemption requires that the permanent establishment’s receipts derive exclusively or almost exclusively from production, the sale of goods, technical advice or technical services. Otherwise, the Serbian tax is only credited; in addition, Section 20 (2) AStG and Section 50d (9) EStG may exclude the exemption.
Can a Serbian d.o.o. be taxable in Germany?
Yes. If the place of management (Section 10 AO) is in Germany, the company has unlimited tax liability here under Section 1 (1) KStG, even if it is registered in Serbia. Under the tie-breaker rule in Art. 4 (3) of the treaty, it is then deemed to be resident in Germany for treaty purposes. A mere registered address in Serbia is as a rule not sufficient.
Does a Serbian subsidiary trigger controlled foreign company taxation?
That depends on the type of income and the actual burden on it. The standard Serbian rate of 15 percent is at the threshold of Section 8 (5) AStG, not below it; however, incentives, for example for licence income, can push the burden below 15 percent. A substance test under Section 8 (2) AStG is not available for Serbia as a third country.
What do I have to report to the German tax office?
Under Section 138 (2) AO, the establishment of a permanent establishment in Serbia, the acquisition of a shareholding of 10 percent or more or where the acquisition costs of all foreign shareholdings exceed EUR 150,000, and gaining a controlling influence over a third-country company for the first time must be notified. The notification is made with the tax return, at the latest 14 months after the end of the tax period. In addition, trade deregistrations or changes of registration are required.
Attorney Dr. Johannes Fiala and the firm have published extensively on international tax and company law and advise entrepreneurs on the German tax consequences of a company or permanent establishment in Serbia, from the permanent establishment review and controlled foreign company taxation to transfer pricing documentation, in coordination with advisers in Serbia. Please get in touch with the firm without obligation to discuss your plans in an initial consultation.
