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How is tax payment regulated when a foreign legal entity is engaged?
Tax treatment of the withheld profit tax
According to Article 29-a of the Profit Tax Law, unless otherwise regulated in the international agreements for avoidance of double taxation, entities who pay income to a foreign legal entity shall be obliged to withhold tax at payment of the income and shall pay the tax withheld to a respective suspense account simultaneously with the payment of the income.
In accordance with Articles 5 and 6 of the Law, an income from a royalty (copyrights) and other rights of intellectual ownership implies payment for use or the right to use the copyright for a literary, artistic or scientific pieces of work, including cinematographic films, computer software, patents, trademarks, designs or models, plans, secret formulas or procedures, or for information related to industrial, commercial or scientific experiences, whose rights are protected by legal regulations and customs, regulating their acquiring and use. If with the agreements for avoidance of double taxation in the regulations where copyrights are defined the software is included as a copyright, a tax for using the copyright shall be withheld in accordance with the provisions of the agreements. In case in the agreements in the same provisions the software is not stated, you are not obliged to withhold the tax and the incomes are treated as the other incomes and are taxed in the state of the foreign receiver of incomes. If Macedonia does not have a concluded agreement for avoidance of double taxation with the country of the foreign receiver of incomes, a tax shall be withheld for using a reserved copyright of the software. Using a copyright implies the right that allows the user to make copies for public distribution and rights for reproduction, for its commercial use. If a license is received for using computer equipment, the purchaser uses that program, but he does not have the right to reproduction of the program, nor using the reserved copyrights, so they are not subject to withholding. The license may also provide permits for limited copying of programs, considered to be necessary when carrying out the activity. If the software is sold with the agreement, that is the software’s copyrights, this transaction is considered to be a sale and is not subject to withholding tax. If the purchased software is used for purchaser’s business activities and he does not reproduce it, publish it, tax is not withheld. If in an agreement purchases are included that are subject to withheld tax, they should be separated. However, if in the agreement the main issue is exempted from tax withholding and the other elements are significant, for the whole agreed amount of income the tax treatment shall be applied to the main issue.
According to the definition, income from technical services is the income realized by maintenance and application of the labor assets, tools, machines, instruments, apparatus, transport vehicles and equipment for carrying out production and other activities.
If the income receiver is a foreign legal entity and we have an agreement for avoidance of double taxation, these services are treated as other services and the tax is paid in the foreign country.
In accordance with Article 5-a, paragraph 3 of the Law, if the permanent establishment of a foreign legal entity registered in the Republic of Macedonia pays to the founder (foreign legal entity) incomes from Article 29-b of the Law, they are paid withholding tax.
In accordance with Articles 5 and 6 of the law, incomes in the form of insurance premiums for insuring or reinsuring against risks in the Republic of Macedonia are considered incomes of the foreign legal entity realized from: 1) premium on the basis of life insurance; 2) premium on the basis of non-life insurance; and 3) premium on the basis of reinsurance, except for premium on the basis of reinsurance that insurance and reinsurance companies of the Republic of Macedonia are obliged to make in accordance with a law.
In the concrete case of the incomes that a foreign entity realizes on the basis of loan insurance, tax shall be withheld and paid in accordance with the stated provision.
In accordance with the Articles 5 and 6 of the Rule book, income from consulting services implies income realized by servicing departments or organizations that deal with giving advice and intellectual services in economic financial and technical projects, that is instructions or a project for certain compensation. Consulting services imply the following: legal, tax, accountancy and auditing services that foreign legal entities perform with allowance for domestic subjects. Consulting services of business counseling imply each form of business counseling or consultation. As an exception, a service of business counseling is not considered to be the following: giving lectures, seminars, workshops and similar teaching methods, services by engineers, architects and similar services that as a result have written documents for taking actions (idea and performing projects, drafts, instructions and other documents for taking actions). The services of mediation and representation in some business deal, as well as the services of using different databases are not considered to be services of business counseling.
According to the above stated, the incomes that a foreign lawyers’ association realizes on the basis of performed services for representation and mediation in lawsuits and other events are treated as incomes from the preformed legal services and tax should be computed and withheld.
The incomes that a foreign legal entity realizes from the performed services on the basis of training courses, lectures to the employees, seminars, workshops and similar teaching methods, which are exclusively of educational character, are not considered to be services of business counseling to which tax shall be withheld and paid.
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