Transcript PART 2: Specific Legal Issues

LEGAL FRAMEWORK
Foreign Investments in Serbia
by
Vladimir Bojanovic
1
* This presentation does not deal with every topic or cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice.
Janković, Popović & Mitić
International Law Firm
Vladimir Bojanović
Attorney at Law, MBA (Cambridge)
—
Membership:
Serbian and Belgrade Bar Association admitted
—
Expertise:
Commercial Law , Corporate/M&A, Foreign Investments, Privatisations
—
Industry Sectors:
Energy & Infrastructure, Telecommunications and Pharmaceuticals
2
Janković, Popović & Mitić
International Law Firm
FULL SERVICE LAW FIRM
—
—
—
—
—
—
—
—
—
—
—
Corporate and Commercial
M&A
Privatizations
Competition / Antitrust
Banking and Finance / Capital Markets
Real Estate / Construction
Energy & Infrastructure
PPPs/PFIs
Dispute Resolution
IP
Employment & Labour
3
Presentation Summary
PART 1:
General Legal
Framework
PART 2:
PART 3:
Specific Legal Issues
Conclusion
4
PART 1:
General Legal Framework
5
PART 1: General Legal Framework

















Law on Foreign Investments
Law on Free Zones
Law on Foreign Exchange Transactions
Law on Foreign Trade Transactions
Customs Law
Privatization Law
Law on the Agency for Privatization
Share Fund Law
Company Law
Law on Securities and other Financial Instruments Market
Law on Takeover of Joint Stock Companies
Law on Registration of Commercial Entities
Law on Concessions
Insurance Law
Bankruptcy Law
Law on Games of Chance
Energy Law
6
PART 1:
1.
2.
3.
Regulation
Foreign Investors
Foreign
Investments
General Legal Framework

The Foreign Investments Law (Official Journal of the FRY, nos. 3/2002 and 5/2003,
the “FI Law”) regulates foreign investments in legal entities engaged in profitgenerating activities in Serbia.

Exceptions: Foreign investments in (1) insurance companies, (2) banks, (3) other
financial institutions and (4) free trade zones are regulated in conformity with the
laws governing their establishment and legal status.
1)
Foreign legal entity whose seat is abroad;
2)
Foreign natural person;
3)
Serbian national having their domicile or residence abroad for a period 1+ year.

A foreign investment is :
1)
an investment in a Serbian company by which a foreign investor acquires
a share or shares in the company’s capital;
2)
acquiring any other property right for accomplishing business interests.
7
PART 1:
4.
5.
6.
Custom
Exemptions
Legal Security
National and
Preferential
Treatment
General Legal Framework

Import of equipment representing a contribution of a foreign investor is exempt
from customs and other import duties. Exceptions are: motor vehicles and
amusement and game of chance machines.

Controversial: two opinions issued by the Ministry of Finance allowing for custom
exemptions in a case of importing equipment bought from the money representing
monetary contribution of a foreign investor.

Foreign investors’ rights acquired on registration of foreign investment cannot be
subject to restrictions by subsequent amendment of laws and other regulations.

Share in a company and assets of the company with foreign share, may not be
subject to expropriation, unless there is a public interest established by the law.

Foreign investors have an equal treatment as domestic investors, unless more
favorable treatment is established by bilateral or multilateral treaty.
8
PART 2:
Specific Legal Issues
9
SPECIFIC ISSUES
Corporate
Accounting and
Audit
Dispute
Resolution
Employment
Taxation
10
Part 2 - Specific Legal Issues:
CORPORATE

Foreign investor may independently or in association with other foreign or domestic investors:
1)
2)
establish a new company (Model A); or
purchase stocks or shares in an existing companies (Model B);
1.
Partnership
Ortačko Društvo
2.
Limited Partnership
Komanditno društvo
3.
Limited Liability Company (“LLC”)
Društvo sa ograničemom odgovornošću
4.
Joint Stock Company (“JSC”) – open and closed
Akcionarsko društvo – otvoreno i zatvoreno

Foreign investor may establish :
1.
Representative Office
Predstavništvo
2.
Branch Office
Ogranak
3.
Direct Strategic Partnerships
“Direktna strateška partnerstva”
11
Part 2 - Specific Legal Issues:
CORPORATE
LIMITED LIABILITY COMPANY - General

In practice, foreign investors usually prefer to incorporate an LLC because of its simple form and fast
incorporation.

Its advantages include the following:
1)
Capital increase may be made without supervision of the SEC
2)
Minimum share capital is EUR 500, as opposed to EUR 10,000 for a closed joint stock
company
3)
Registration is performed in practice in 2-5 days.
12
Part 2 - Specific Legal Issues:
CORPORATE
LIMITED LIABILITY COMPANY - Registration

LLC Registration documents:
–
–
–
Filled-in BRA registration form;
Founder’s certificate of incorporation (for legal person) or copy of ID/passport (for natural persons);
Decision of the founding company on establishing a limited liability company in Serbia with designation of
the persons authorized to sign Memorandum of Association (the “MoA”) before the Serbian court;
MoA with the notarized signatures of founders (or their authorized representatives) by the Serbian court;
Decision on appointment of the company’s legal representative, if not appointed in the MoA;
Copy of the passport (or ID for domestic citizens) of the designated representatives of the company;
Duly notarized OP form for certification of the representative’s signature (notarized by the Serbian court);
Duly completed application forms for opening of a temporary bank account and bank certificate on
payment of the monetary founding contribution in the temporary bank account;
–
–
–
–
–

All the documents coming from abroad should be notarized, with apostil, accompanied with the official
translation into Serbian by a sworn-to-court interpreter.
13
Part 2 - Specific Legal Issues:
CORPORATE
BUSINESS ACTIVITIES:
A.
COMPANIES:

A company with foreign share may perform all activities, except :
1)
2)

In the field of production of and trade in arms, or
in areas defined as restricted zones (e.g. border zones, national parks).
Foreign investor may establish the company in the above-mentioned field, or invest its capital in it
together with a domestic entity:
1)
2)
without acquiring the majority rights in the management of such company, and
only with the consent of the Ministry of Defence of Serbia.

Special laws also regulate business areas in which foreign investors may not, alone or with another
foreign investor, establish a company e.g. Broadcasting Law.
B.
REPRESENTATION OFFICES:

Foreign company’s rep office can perform only activities registered as the prevailing activity of the main
company (EXCEPTIONS – Rep offices of the companies registered in Serbia).
14
Part 2 - Specific Legal Issues:
ACCOUNTING AND AUDIT

Legal entities are to apply the International Financial Reporting Standards (IFRS) in preparing their
financial statements.

The application of these standards and accounting framework are prescribed by Decrees of the Minister of
Finance for companies, and the Governor of the National Bank for banks.

The Decrees and the Law differ in some aspects from IFRS, resulting in some deviations of local accounting
standards actually applied from IFRS.

Company with the foreign share may decide to keep books in accordance with:
1)
Serbian regulations, or
2)
International Accounting Standards (IAS), i.e. (IFRS).
15
Part 2 - Specific Legal Issues:
ACCOUNTING AND AUDIT


Annual Financial Statements are prepared on December 31, with two exceptions:
1)
Foreign company subsidiaries, for which the financial year differs from the calendar year, may
prepare and submit their financial statements at the parent company's financial year end, with
the prior obligatory approval from the Ministry of Finance;
2)
Entities undergoing a change of status (e.g. merger, liquidation, or bankruptcy) are required to
prepare their financial statements at the date on which this procedure is completed.
In principle, legal entities must file:
1)
2)
3)

financial statements by 28 February;
consolidated financial statements by 31 April;
approved financial statements by 30 September (30 October for consolidated FS).
Audit is mandatory for all medium-sized and large companies. Medium-sized companies must change
auditors every five years, large companies every three years.
16
Part 2 - Specific Legal Issues:
DISPUTE RESOLUTION
A.
DISPUTES BETWEEN THE REPUBLIC OF SERBIA AND A POTENTIAL INVESTOR

The RS and the Kingdom of Spain concluded the Bilateral Agreement on mutual investment protection on
25 June 2002, which, inter alia, regulates dispute resolution regarding foreign investment, between the RS
at one side and a foreign investor on the other side:
―
Step 1:
disputes are declared in writting by a foreign investor and adressed to the RS
represented by the competent authority;
―
Step 2:
the RS and the foreign investor shall try to resolve the dispute ammicably;
―
Step 3:
If the dispute cannot be resolved ammicably within 6 months as of delivering
the written notification to the RS, the dispute may be addressed to:
a)
b)
c)
competent court of the RS;
“ad hoc” arbitration tribunal, in line with UNCITRAL Rules;
International Center for the Resolvment of international Disputes (ICSID);
17
Part 2 - Specific Legal Issues:
DISPUTE RESOLUTION
B.
DISPUTES BETWEEN FOREIGN INVESTOR AND POTENTIAL SERBIAN PARTNERS

Any dispute related to foreign investment may be settled either before the Serbian court or in
arbitration as agreed between the parties. In May 2006, Serbia enacted its first Law on Arbitration
permitting the use of:
a.
b.
c.
d.

institutional arbitration
“ad hoc” arbitration
international arbitration
domestic arbitration.
DOMESTIC INSTITUTIONAL ARBITRATION: The Foreign Trade Court of Arbitration (founded in 1947) is
located within the Serbian Chamber of Commerce and is a domestic arbitration body. Arbitration is
voluntary and conforms to the UNICTRAL model law.
18
Part 2 - Specific Legal Issues:
EMPLOYMENT
RESIDENCE AND WORK PERMITS
―
Foreign national intending to work in Serbia under employment contract would have to obtain:
a)
Temporary Residence Permit (the “TRP”)
―
b)
TRP is necessary for foreign nationals intending to work/reside in Serbia, and it is issued in 2
steps:
1.
Registration of the foreigner’s presence at the territory of Serbia in a period of 24 hours from
arrival by obtaining the "white card”. White card may be issued by the local police (if a foreign
citizen leased the apartment) or by a hotel (if a foreign citizen stays in a hotel).
2.
Visit to police and applying for residence permit with required documents, within 90 days as
of the arrival to Serbia.
Work Permits
―
An employee would need to apply for issuance of work permit and submit documents to the
National Employment Service (NES) whereby NES issues the work permit within several days
provided that all submitted documents are satisfactory
19
Part 2 - Specific Legal Issues:
EMPLOYMENT
TERMINATION OF EMPLOYMENT FOR BUSINESS REASONS:

The employment relationship can be terminated for various reasons, including decrease in the volume of
work due to technological, economic or organizational changes.

The employer is obliged to pay redundancy compensation to the employee, and it is prohibited to employ
another person at the same position in the period of six months following termination.

If the demand for work on the same position arises before expiry of the six months, preference shall be
given to the employee whose employment on the same position was terminated.

Adoption of a Redundancy Programme is the obligation of the employers if a certain number of
employees, depending on the total number of employees, are to be declared redundant.
20
Part 2 - Specific Legal Issues:
TAXATION
SUB-PART 1:
CORPORATE INCOME TAX
1.
Regulation

Corporate Income Tax Law (“CIT”)
2.
Accounting
Period

Accounting period which is to be used for tax purposes is the financial year.
Financial year is a calendar year, except when the business is dissolved or started
up or status-related changes are made in the course of a year.
3.
CIT Rate

10%
4.
CIT Base

Income from the Profit and Loss Statement, made in accordance with the IAS and
IFRS.

Non-residents that do not have the permanent establishment pay 20% witholding
tax on income from dividends and participation in profits of legal entities,
intellectual property, interest, lease of real estate and movable property, as well
as capital gains
21
Part 2 - Specific Legal Issues:
TAXATION
5.
6.
Taxable Entities
Holding
Companies

Serbian tax resident entities are taxed on their income generated on the territory
of the Republic of Serbia, as well as on their worldwide income. An entity is
considered a resident of Serbia if it is established or has its place of effective
management and control at RS.

Non-residents are taxed only on their income sourced through a permanent
establishment on the Serbian territory. A permanent establishment is any
permanent place of business in Serbia through which a non-resident conducts its
business.

A branch constitutes a permanent establishment of a non-resident taxpayer per
default. Consequently, CIT is payable on profit attributable to the operations of a
branch. Tax transparent entities do not exist.

No special holding company regime exists in Serbia. Holding companies operate
under the same rules as any other company
22
Part 2 - Specific Legal Issues:
TAXATION
9.
10.
Tax
Holidays
Tax Credits

Up to ten-year tax holidays for companies investing RSD 800 million (approximately
EUR 8 million) and employing at least 100 workers, in proportion to investment.

Up to five-year tax holidays for companies investing RSD 8 million (approximately
EUR 80 thousand) and employing a minimum of five workers in underdeveloped
regions, in proportion to investment.

Tax credit of 20% (small enterprises 40 %) for investment in fixed assets, up to 50 %
(small enterprises up to 70%) of CIT liability. Any unused tax credit can be carried
forward for ten years. Transfer of tax credits in mergers, de-mergers, spin offs and
other corporate group reorganizations is not possible.

A taxpayer, classified in accordance with relevant legislation and registered for
conducting business in certain industries, is granted a tax credit for 80% of its
investment in its own fixed assets in the current year. There are no limitations
related to taxable profit made by the taxpayer. This tax credit can be carried
forward for up to ten years.

A company generating profit in a newly established business unit of a Serbian
company in an underdeveloped area has the right to decrease its tax liability,
proportionally to the share of total profit attributable to the business unit over a
period of two years. The newly established business unit must keep separate
accounting records.
23
Part 2 - Specific Legal Issues:
TAXATION
11.
Double
Taxation
Treaties in force

Albania, Belgium, Belarus, Bosnia and Herzegovina, Bulgaria, Czech Republic,
Denmark, DPR Korea, Egypt, Finland, France, Holland, Croatia, India, Italia,
China, Cyprus, Kuwait, Latvia, Lithuania, Hungary, FYR Macedonia, Malaysia,
Moldova, Germany, Norway, Poland, Romania, Russia, Slovakia, Slovenia, Sri
Lanka, Switzerland, Sweden, Turkey, Ukraine, Great Britain
12.
Double
Taxation
Treaties In
procedure

Austria, Greece, Spain, Pakistan, Azerbaijan, Malta, Republic of Ireland,
Estonia, Libya, Qatar
13.
Example:

Double Taxation treaties with the Netherlands and Cyprus.
24
Part 2 - Specific Legal Issues:
TAXATION
SUB-PART 2:
PERSONAL INCOME TAX

Non-residents are only liable to tax on Serbian sourced income.

Double Tax Treaties between Serbia and expatriates’ residence countries can limit the Serbian right to tax
or offer relief for the double taxation of certain types of income.

Double Tax Treaties provide for resolving tax residency disputes, i.e. situations in which, according to the
local rules of the respective countries, a person is deemed to be a tax resident of both countries.

In certain cases, remuneration of non-residents working for diplomatic and consular missions or
international organizations in Serbia is not taxable.
25
Part 2 - Specific Legal Issues:
TAXATION
SUB-PART 2:
PERSONAL INCOME TAX
TAX AND SOCIAL CONTRIBUTIONS REGARDING SALARIES

Formula for calculation of the total costs for an employer related to salary of one employee:
TC=G+0.179G
(TC is total cost, G is gross salary and 0,179 is joint percentage of social contributions).

Gross salary is calculated in the following way:
G=(N-786.48)/ 0,701
(N is net salary and 786,48 RSD is not taxable part of the salary applied on monthly basis to the
total amount of net salary in the relevant month. This figure is amended on an annual basis each
January)
26
PART 3:
CONCLUSION
27
Part 3:
Conclusion
Investments



Equal treatment of foreigners
Statutory guarantees for the protection of investments
Bilateral agreement with Spain
Corporate




Most common legal form is an LLC
Registration of an LLC from 2 to 5 days in practice, with low costs involved
It can perform all legally allowed activities apart from certain exceptions
It can acquire real estate for accomplishing of business purposes
Accounting


Possibility to change the duration of a business year
Possibility to keep books and financial reports according to IFRS standards
Dispute



Parties can agree to have arbitration in a case of dispute
Arbitration can be domestic or international, ad hoc or institutional
Flexibility in choosing the impartial forum in a case of dispute with the state
Employment


Work permit required for foreigners
Business-related termination of contracts possible
Taxation



CIT 10% Tax Rate
Double taxation treaties with many countries
Tax Credits and Tax Holidays
28
Thank you for your Attention.
Q&A
E-mail:
Phone:
[email protected]
+381.60.3.777.444
29