Google Merchant Account – new tax opportunities

Pavle Kutlešić,
Manager | Tax & Legal, Deloitte Serbia

About two weeks ago, almost secretly, the official Google site published a change concerning something that is well known to local developers, and which concerns the supported countries for registration of developers and merchants on the Google Play Store (the so-called Google Merchant Account program).

This allows local developers to place their applications – IPs (including by-products, so-called in-app purchases) on the huge digital market provided by the Google Play Store directly from Serbia, without the need for complex business and legal constructions that they had to the goal is to provide access to the Google Play Store via another country (eg Malta, Cyprus, Croatia, Hungary).

On the other hand, at the end of 2018, Serbia introduced new tax incentives intended for the knowledge industry, which designs, creates and generates income from intellectual property in Serbia.

Accordingly, in the continuation, it will be considered what possibilities of new business models for local developers are opened by the mentioned change in relation to the previous business models, and in the light of the newly introduced tax incentives, ie. IP Box, R&D deduction and incentive for investors.

Previous business models and their limitations in the light of tax incentives

Previous business models of developers mainly involved moving the IP to one of the aforementioned foreign countries, ie to a specially established foreign company (owned by a local developer or without a direct connection), which then placed the IP on the Google Play Store and collected user revenue (from IP licensing and from in-app purchases), while the local company eventually collected advertising revenue within the IP. Bearing in mind that IP in these business models is not located in Serbia, the local society, although essential for the creation of IP, as a rule did not meet the conditions for the application of tax incentives.

In most cases, payments from the company abroad were limited to maintenance fees, because payments of royalties (in the case of IP licensing) or dividends (in the case of profit distribution, provided there is an appropriate ownership relationship) are often subject to taxation in a foreign country.

In addition, there were various practical problems of the described model, which are primarily reduced to additional costs of maintaining the company abroad, which include administrative costs of establishing and maintaining the company, the cost of hiring a lawyer or similar attorney, but also tax costs due to taxes imposed by the party. the state may impose, which will affect the overall profitability of the model.

Changing the business model and the possibility of saving by using tax incentives

Now a local developer can place their IP directly on the Google Play Store and collect all the revenue from that IP from the very beginning. In other words, a developer can be funded directly from IP licensing and from in-app purchases.

The first obvious advantage of this model is the absence of additional administrative costs related to the maintenance of the company abroad and potential tax costs that may affect certain types of payments from abroad (eg royalties or dividends).

Another advantage is reflected in the newly introduced tax incentives so that different business models are now possible that use one or more of the following tax incentives.

IP Box

A local developer (start-up or a studio) collects revenue from an already developed IP, which it markets directly through the Google Play Store. In this case, the tax incentive is provided by a local developer, who (if the prescribed conditions are met) can exempt up to 80% of the income he collects from IP from taxation, thus reducing the effective corporate tax rate by up to 3% (nominal rate is 15 %). In earlier business models, this tax incentive was usually not applicable because local developers did not own IP, and did not collect IP revenue.

R&D Deduction

A local developer (start-up or a studio) is working on developing a new IP that it plans to market directly through the Google Play Store. In this case, the tax incentive is provided by the local developer, who reduces their current or future tax liability through double tax recognition of new IP development costs (regardless of whether the development activities resulted in the creation of IP), ie the incentive potentially includes projects that prove unsuccessful). Similar to the previous example, in earlier business models this tax incentive was usually not applicable because local IP developers developed for the needs of another person

Incentives for investors

A local small developer – a start-up company, in which an investor invests by recapitalizing in money in order to develop their IP and thus place the developed IP directly on the market through the Google Play Store.

In this case, the tax incentive for investing in start-up companies is realized by an investor who (if the legally prescribed conditions are met) has direct tax savings due to investing in a local developer in the form of a tax credit of 30% of the value of the cash deposit. -up received funds for further IP development activities.

This tax incentive in earlier business models was usually not feasible as the work for hire work performed by local developers (i.e. only ongoing IP maintenance) did not allow for the application of this tax incentive.

Therefore, it can be said that classifying Serbia in a supported location has very positive effects on the applicability of new tax incentives and that the combination of these two factors can significantly contribute to the competitiveness of local developers. However, in order to increase competitiveness, primarily in the global market, it is necessary for local developers to be well acquainted with the benefits available to them, in order to be able to make an informed decision regarding future business models.