Serbian property developers financing construction through shareholder loans and related companies must assess interest deductibility when completed properties are sold, following a clarification by the Ministry of Finance on the application of thin-capitalisation rules.
The ministry opinion establishes that interest capitalised into construction costs is not immediately subject to these restrictions. The rules apply when properties are sold and the associated borrowing costs enter the company’s income statement.
Interest Deductions Apply at the Point of Sale
Under Serbia’s Corporate Income Tax Law, interest on loans from affiliated companies is generally deductible within limits linked to the borrower’s equity. For most companies, related-party debt is restricted to four times net equity, while banks and financial leasing companies face a separate tenfold threshold.
The ministry examined a developer financing a residential-commercial complex in phases through loans from a related legal entity. Under International Accounting Standard IAS 23, eligible borrowing costs were capitalised into the construction costs of apartments, commercial premises, garages and other properties.
The ministry concluded that restrictions do not apply while interest remains capitalised in work-in-progress inventories. When an individual property is sold, the developer must identify the interest attributable to that property and determine its deductibility. The interpretation clarifies existing rules rather than introducing a new tax exemption.
Related-Party Debt Can Increase Tax Liabilities
A developer with €1.5 million in net equity and €8 million in average related-party borrowing would exceed a simplified four-to-one threshold of €6 million. Depending on the applicable calculations and financial position, some interest costs could become non-deductible when properties are sold. At Serbia’s 15% corporate income tax rate, every €100,000 in disallowed interest expense would increase tax by approximately €15,000, assuming sufficient taxable profits and no offsetting adjustments.
The clarification is relevant to developers using shareholder, parent-company and other affiliated-party loans alongside commercial bank financing. Tax liabilities recognised at the sales stage may reduce funds available for debt repayment, sponsor distributions and subsequent construction phases.
Banks may need to scrutinise sponsor equity, related-party loans, commercial borrowing and projected sales more closely. For developments built in multiple phases, reliable allocation of financing costs to individual properties and reconciliation of accounting and tax records are important elements of financing due diligence.
EU-Aligned Borrowing Rules Planned
Serbia’s planned transition to EU-aligned restrictions on borrowing costs would introduce a framework based on 30% of EBITDA or €3 million, whichever is higher. The provisions are scheduled to apply upon Serbia’s accession to the European Union. For projects extending across several years, developers may need to balance shareholder lending with equity contributions, commercial bank financing and retained earnings. The tax treatment of capitalised interest will remain an important factor in project profitability alongside property prices, construction costs and borrowing rates.
