Corporate Taxation and Subsidy Distortions as Barriers to Private Domestic Investment in Serbia

Abstract

This paper examines the structural barriers to private domestic investments in Serbia, with a particular focus on the role of corporate taxation and subsidy policy. The analysis combines descriptive empirical data, comparative legal assessment, and institutional diagnostics to explore why domestic investments have remained persistently low relative to both foreign direct investments and levels observed in comparable EU economies. Using Eurostat and World Bank data for the period 2013–2022, the paper documents that total investment growth in Serbia has been primarily driven by rising FDI inflows and increased public investments, while domestic private investments have remained weak. Despite a relatively high fiscal effort devoted to investment incentives, including both tax-based instruments and direct subsidies, the design and allocation of these measures appear to disproportionately benefit large investors – most often foreign. The paper contextualises Serbia’s statutory and effective corporate tax rates within EU norms and identifies significant structural asymmetries in incentive accessibility between firms of different sizes. It also develops a classification of corporate tax incentive regimes in selected EU member states and Serbia, based on the structure and conditions of tax-based investment support, which is used to assess Serbia’s position relative to prevailing EU practices in the design of fiscal incentives. Institutional barriers, including legal uncertainty and administrative inefficiency, further constrain domestic investments. The findings suggest that Serbia’s current investment model is unlikely to support sustainable long-term development unless policy is rebalanced to improve the investment climate for domestic firms. The findings inform policy recommendations aimed at rebalancing incentive structures and strengthening institutional and financial conditions for domestic investments.