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The Government of the Republic of Serbia

In the service of citizens

Lower income tax as of next year

Belgrade, 8 February 2006

Serbian Minister of Finance Mladjan Dinkic said today that the government will pass a law on an income tax decrease this September which should be enforced as of January 1, 2007.

Mladjan Dinkic at today's press conference

At a press conference, Dinkic explained that for every net 100 dinars earned, the state collects 73 dinars of tax and contributions, which is far greater than in neighbouring countries. He added that the government's aim is to reduce the tax to around 60 dinars.

Because there was a €330 million surplus in Serbia's 2005 budget, the government decided to employ four key measures for stimulating employers to hire young people, he explained.

Dinkic specified that the government plans to achieve a surplus of 2.5% GDP this year and announced that according to the new law, there will be a new synthetic tax on citizen income, which will for the first time interlock income and property.

The government will also adopt measures for stimulating youth employment. For instance, if an employer hires a trainee, they will not have to pay tax and contributions for three years, and if they hire people below 30 years of age they will also receive certain incentives, said Dinkic.

These measures will bring about an increase in the domestic economy, he said, adding that young entrepreneurs will be able to receive very favourable "start up" loans from the Development Fund, while the Fund for Young Talents will set aside €10 million for stipends and rewards for certain achievements.

Dinkic said that around €60 million will be set aside for housing loans for young couples and that all these measures will help solve the serious unemployment problem in Serbia.

He pointed out that the Ministry of Finance is preparing 68 laws on free zones, public tenders, securities market, foreign exchange transactions and state assistance.

According to Dinkic, the new Law on Mortgage is to enter into force on March 1, and it will reduce the tax on mortgage registration from the current 80,000 dinars to 2,000 dinars for housing loans insured with the National Service for Housing Loan Insurance.

The Ministry of Finance plans to issue new long-term Treasury notes, Dinkic announced and reiterated that the law on financing local self-government will be passed by June this year, bringing fiscal decentralisation to municipalities in Serbia as well as more responsibilities for them.

In order to stimulate balanced regional development, the government will grant favourable loans to another 22 municipalities besides Bor, Kragujevac and Vranje, when the average income is below one-third of the republic average, said Dinkic.

"Furthermore, following the successful completion of the three-year arrangement with the International Monetary Fund (IMF), the World Bank has positively assessed Serbia's creditworthiness", said Dinkic.

"The World Bank's assessment will enable new loans for financing infrastructure and investment projects in Serbia", he added.

Dinkic announced that together with Minister of Economy Predrag Bubalo and National Bank of Serbia Governor Radovan Jelasic, he will meet with ambassadors of European countries and ask each of them individually to write off a portion of the debt Serbia owes, which according to the Paris Club of Creditors stands at $700 million.

He stressed that the IMF's positive assessment means that Serbia has fulfilled the necessary conditions for Japanese banks to join investment programmes in Serbia and take part in financing the construction of a bridge in Belgrade.

"We can now expect far better loan terms, though not so much for the state as for local self-government", Dinkic pointed out and announced that Standard & Poor's Ratings Services may reconsider its long-term sovereign credit ratings on Serbia.

The conclusion of the arrangement with the IMF has triggered a positive domino effect regarding foreign direct investment which this year is expected to total around $2 billion, he said.

According to Dinkic, the World Bank confirmed that Serbia's loan debt has been reduced four times – from 180% five years ago to its current figure 44% of GDP.

Dinkic announced the government will fight inflation through many additional mechanisms this year, one of which will be an amendment to the Antimonopoly Law regarding the reduction of the sales margin.