Category: Serbia

As with each year, December was one of the busiest months and the Serbian Parliament was especially industrious. The aforementioned resulted in adoption of a very welcome set of amendments to the Serbia’s Company Act by the Serbian Parliament.

The amendments have formally been introduced by the Act on Amendments to the Company Act on 23 December 2019. They are aimed at finally creating a possibility for LLC companies (by far the most frequent company form in Serbia) to incentivize employees and other persons vested in the company business by giving them an option to acquire shares of the company.

Of course, the idea is all but brand new. The principle of granting equity as an incentive has been used for a number of decades now, and has especially flourished in late 1990s during the dot-com boom. And as back then in the US, today in Serbia seemingly the most benefit of granting equity as an incentive will be reaped by tech startups and information technologies companies.

Formally, the procedure of granting equity to employees enrolls one or more shareholders transferring a part of their respective shares of the company, to the company, free of charge. Those shares held by the company are known as the “reserved own share”. After the company has obtained the “reserved own share”, a decision on the issuance of the financial instrument is adopted to which the “reserved own share” relates. The newly formed financial instrument – “right to acquire a share” is defined as a nontransferable financial instrument issued by the LLC, providing the beneficiary the right to acquire the share under terms and conditions agreed upon with the company.

When you consider how beneficial accepting equity as an incentive for certain individuals was, it is easy to get excited. Just as an example, in 2013 during Twitter’s IPO the previous Twitter executive Ali Rowghani exercised 300,000 stock options at 84 cents each, and sold the shares for $33.76 per share, resulting in a $9.9 million profit.

However, if not structured correctly, equity may have downsides both for the company and for the individual who is being incentivized.

In the past, there were many allegations of abuse of these incentive schemes by various unethical companies, and moreover, there is obvious room for misuse of rights derived from a share in a company by a dissatisfied individual. Therefore, it is well advised to comprehensively structure any scheme that enlists granting equity in a company to individuals, well before such scheme has been implemented by a company.

With respect to the amendments to the Company Act discussed above, most of the implemented changes will take effect as of 1 April 2020, which should provide sufficient time for competent bodies to further work on the framework for complete implementation of the novelties introduced by the amendments.

This text is for informational purposes only and should not be considered legal advice. Should you require any additional information, feel free to contact us.

By Milos Velimirovic, Partner, and Milan Novakov, Senior Associate, Samardzic, Oreski & Grbovic

On 3 August 2019, National Assembly of the Republic of Serbia has adopted the long-awaited amendments to the Enforcement and Security Act (“Act”), which entered into force on 1 January 2020. Having in mind the extent of amendments (more than 170 Articles), we can say the we practically have a new Enforcement and Security Act.

We will try to summarize the most important changes to the Law in the following paragraphs. Due to the large number of changes to the Act, this text shall only cover the most important ones and ones that will have a big impact on future enforcement proceedings.

1. Greater Jurisdiction of Public Bailiffs

Starting from 1 January 2020, debt collection from the Republic of Serbia, autonomous provinces, local authorities, as well as from all direct and indirect Budget users, shall be conducted only through enforcement proceedings before Public Bailiffs.

This means that Public bailiffs shall be entitled to initiate enforcement by adopting the Decision on Enforcement, which until now was in exclusive jurisdiction of the courts (save for the debt for utilities).

Besides this new procedure, the Act also introduced a new obligation for creditors before filing a motion for enforcement against debtors. All creditors will now be obliged to notify the Ministry of Finance about their intention to file a motion for enforcement at least 30 days earlier and proof of such notice is a mandatory appendix to the motion for enforcement.

2. Electronic Public Auctions of Real Estate

Starting from 1 March 2020 Public Bailiffs will be able to decide if the public auction of real estate will be performed via electronic or regular auction procedure. This was introduced in order to prevent different kinds of unwanted behavior aimed at abusing the auction procedure. Although the procedure is optional, this is only temporary – starting from 1 September 2020, all public real estate auctions shall be conducted only as electronic public auctions.

The Act does not set the rules for electronic auctions, but it does stipulate that such procedure shall be more closely regulated by the Minister.

A few additional important changes were introduced in relation to the deposit that all participants must pay so they can participate in the real estate auction. Deposit amount has been increased from 10% to 15% of the real estate’s estimated value, and now it has to be paid at least 2 days before public auction.

Another interesting change has been introduced in relation to the direct bargain sale of real property by deleting the sale price limit. Previous version of the Act stipulated that real estate could not be sold for less than 70% of the estimated price by a direct bargain.

3. Summary Enforcement Procedure

Besides the regular enforcement proceedings, the Act also provides new rules for summary enforcement proceedings. Rules of the summary enforcement proceedings apply under the following conditions:

• the competent court for enforcement proceedings is the Commercial court;
• enforcement can be performed only on the basis of the following credible documents: (i) promissory note or check of domestic or foreign entity: (ii) unconditional bank guarantee; (iii) unconditional letter of credit, and (iv) certified statement from the debtor authorizing a bank to transfer funds from its account to creditors account.

The main difference between a regular enforcement proceeding and a summarized one is in shorter deadlines. A debtor can file an objection within 5 days as of when they received the decision on enforcement and the creditor can respond to the objector within 3 days.

4. Enforcement against Debtor’s Intellectual Property

New Enforcement instruments were introduced with Amendments to the Act. As of 1 January 2020, creditors can seek enforcement on other property rights of the debtor which include patent, trademark, and other intellectual rights.

5. Voluntary settlement procedure in front of public bailiffs

In order to decrease costs of the enforcement procedure, a voluntary settlement procedure has been introduced by the Law. Such procedure can be initiated by the creditor before commencing the enforcement proceedings. With a written request, the creditor has an obligation to provide an executive or credible document. On the basis of such request, public bailiffs invite the debtor to settle the debt voluntarily within a period of 60 days. If the debtor does not respond within 60 days, it shall be deemed that the debtor has refused to pay the debt voluntarily. Even though this procedure is completely voluntary, by initiating it, the statute of limitation for the debt is increased for additional 60 days.

 

This text is for informational purposes only and should not be considered legal advice. Should you require any additional information, feel free to contact us.

By Milan Samardzic, Partner, and Nemanja Providzalo, Senior Associate, Samardzic, Oreski & Grbovic

Republic of Serbia (“RS”) has recently amended its tax law provisions on individual income tax by adopting Act on Amendments of the Individual Tax Act, published in the Official Gazette of the RS, No. 86/2019 (“Act”). Among many changes, the one that attracts the most attention is the inclusion of a test on “dependence” and its influence on the tax status of entrepreneurs. The Act sets out the criteria which are to be applied by the tax authorities (“TA”) to determine cases in which the entrepreneur is not actually independent from his client. Entrepreneurs that do not pass this test will be similarly treated as if they were employees, and will, therefore, be subject to a different tax regime.

The criteria employed by the independence test aim to determine the nature of the relation between the client and the entrepreneur. The criteria relate to the entrepreneur’s financial, contractual, professional, recruitment and instructional dependence to the client. Five of nine of the following criteria have to be fulfilled in order for the different tax regime to be applied:

• The working hours, vacation or leave are determined by the client, and the entrepreneur’s financial compensation is not reduced during the time spent on leave;
• The entrepreneur usually works at the client’s premises, or the client provides the tools or other means necessary to conduct work, or finances the acquisition of those tools;
• The client organizes training and education for the entrepreneur, or he manages and leads the entrepreneur’s work process;
• The entrepreneur has been engaged after a public call or by a recruitment agent;
• The entrepreneur usually conducts work together with other contracted entrepreneurs engaged by the same client;
• At least 70% of the entrepreneur’s revenue obtained in the previous 12-month period which begins or ends in the respective tax year is obtained from the client;
• The entrepreneur does not bare the usual business risk by contract for work delivered to business partners of the client;
• The agreement concluded between the client and the entrepreneur contains clauses that prohibit the entrepreneur to provide services to other clients;
• The entrepreneur works for the same client for 130 or more days in a 12-month period which begins or ends in the respective tax year.

The amendments also introduce the notion of the expected dependency status. Namely, if at the beginning of a business cooperation can be expected that five out of nine criteria of dependency will be fulfilled, the income arising from that cooperation will be subject to a different tax regime in case the status of an entrepreneur is afterward determined as a dependent. The income obtained in the period when the dependence test is not attained will be equated with the income obtained in the status of dependence in terms of tax treatment. Legal provisions do not provide the TA with any additional guidance and no further evidence than a simple “expectation” is required from the TA. As a result, the TA has unrestricted discretion to determine the tax status of the entire income obtained from a client in the course of entire business cooperation. It is expected that in most, if not all, of the cases where the TA is to confirm the dependence status, all income obtained from the client is to be treated in the same manner and be subject to the special tax regime.

What do these changes practically mean?

The main intention of the proposed changes is the reduction of the grey economy and the increase of the government budget inflow. However, it is yet to be seen how effective these changes are to be in practice. The status of the dependant entrepreneurs is to be practically equated with the status of the employees for tax and budgetary purposes.

The potential consequences of the “dependent” status are particularly problematic for flat-rate taxed entrepreneurs. The tax base and as a consequence the amount of tax payable for the flat-rate taxed entrepreneurs depends on different factors, including the subject of the work, location of the entrepreneur’s seat, etc. The tax regime was appealing for many professionals, diminishing the tax burden and making income obtained more competitive. “Dependent” entrepreneurs cannot opt for flat-rate taxation.

One of the most important changes is that now income obtained in the status of “dependence” is not considered “income from the independent profession” but it’s classified as “other income”. Whereas the tax rate on the income from employment and the income from the independent profession is 10%, the taxable rate of “other income” amounts to 20%.

The goal of this change is to make the position of the “dependent entrepreneur” unsustainable and transform what legislator considers pseudo-entrepreneurs into employees. The professional that did not pass the dependency test, by being taxed higher, is being incentivized to enter into a labor agreement with their client and become an employee. Although by doing this they lower the tax burden, they also lose the tax incentives they had in the position of an independent contractor.

In practice, this may disincentivize professionals, as well as companies from certain industries (such as IT) to work in Serbia. To alleviate the negative aspects of the proposed changes in the short term, incentives for hiring unemployed people as well as sole entrepreneurs are provided, as well as changes in the area of payroll taxation for newly founded innovative companies.

How the Act is to be applied?

The practical results of the current changes directly depend on the aptitude and expertise of the TA officials. It is reasonable to expect that acting TA officials will have significant expertise in applying the dependence test, as the opposite could potentially have problematic results and lead to legal uncertainty. That expectation may turn out to be overly optimistic as the TA officials have proven to be inefficient in matters where they have to apply legal provisions containing different criteria. Some examples where they historically demonstrated this inefficiency is transfer pricing or the principle of facticity. Furthermore, these inherent inefficiencies of the tax authority apparatus are less of a concern compared to the actual danger of misapplication of the material legal provisions on the status of the entrepreneurs.

It is expected that the TA will follow the decisions and the interpretation of the independency test of the Ministry of Finance. Yet, the final say stays with the courts, and the fact that the decision periods of the Administrative Court in practice amount to almost two years remains as a glaring practical issue. In addition, the Administrative Court never opts for actually solving the case and most of the time return the cases to lower courts. Judicial proceedings are lengthy while tax enforcement procedures are strict and efficient, making implications of this situation for independent professionals quite significant. And while the actual effects of the proposed changes are yet to be seen in practice, a shadow of doubt cast by the earlier practices of the tax authority remains present in our evaluation of their ability to apply these new tax provisions successfully.

This text is for informational purposes only and should not be considered legal advice. Should you require any additional information, feel free to contact us.

By Milos Velimirovic, Partner, and Stefan Jugovic, Associate, Samardzic, Oreski & Grbovic

Since 2013 and adoption of the Rulebook on conditions of breeding of Cannabis Sativa L, a.k.a industrial hemp, the Republic of Serbia acknowledged its production and cast a new light on domestic agriculture. Even though industrial hemp has been a prodigy to older generations for its miraculous multi-purpose benefits, younger generations often misplace it for marijuana, derived from a similar sort – Indian hemp. Regrettably, a similar misunderstanding in regards to its effects is often made by competent state authorities.

The ’’high’’ in relatively low numbers

A small but relevant difference in two cannabis sorts is the percentage of THC, which can be found in industrial hemp in only 0,3% and 10% or higher in Indian hemp. The Rulebook aims to contain the misuse of the cannabis plant, by limiting the breeders to cannabis sorts with less than 0,3%.

In 2015, a hemp breeding society ’’Konoplja’’ emerged in Serbia, gathering cannabis breeders with legally acquired lots dedicated to widening the production of cannabis intrastate. As a result, the year of 2019 measured over 1000 hectares of Serbian land under cannabis plants.

CBD and THC – oranges and mandarines

Even though both CBD and THC have the same molecular structure, the different arrangement of atoms is what separates the ’’safe’’ from ’’ miscellaneous’’. While CBD is a non-psychoactive compound, THC may cause psychotic side-effects, such as hallucinations, memory loss, and slower reactive systems. However, both compounds have ground-breaking medical effects in treating the following conditions:

• multiplex sclerosis
• seizures
• mental disorders
• insomnia
• pain
• nausea
• anxiety

The reason state authorities often look at hemp plants as potentially dangerous, is the fact they contain both THC and CBD. Nonetheless, compared to marijuana plants, THC found in hemp is expressed in only up to 0,3 % and the occurrence of CBD, diminishing the effect of THC even more, makes the hemp plant completely harmless.

Playing by the (Rule)book

If you are a company with main activity in agriculture or an aspiring farmer, interested in a relatively new investable business, this is what you should know about cannabis breeding in Serbia:

• Cannabis Sativa L with less than 0,3% THC is the only legal hemp for breeding
• Condition for obtaining a permit to grow hemp for the production of fiber, seed production for animal nutrition, processing, and seed quality testing is to use seeds in accordance with the law governing seed
• Condition for obtaining a permit to grow hemp for further reproduction of seed is to be inscribed in the Register of seed producers
• Among other elements, you must describe the purpose for which you’re breeding hemp in the request for hemp breeding permit, so bear in mind that uses other than the described one may have a legal consequence
• The license is issued for a period of one year
• The license will not be issued to persons or legal entities who were previously punished for illegal breeding, consummation or stashing of cannabis

CBD: Cannabis breeding disapproval?

The Government’s multiple proposals on banning the flower of industrial hemp, as the main source of CBD oil, came as a surprise to experts in the field of medicine. The WHO (World health organization) proposed the removal of cannabis from the list of narcotic drugs due to its helpful medical effects.

However, Serbia is far from accepting such a standpoint, as authorities are still weighing if the existing Rulebook should live to see another year. Finally, even without the most lucrative part of the plant, breeders may use the fragments of cannabis for surprising purposes such as heating and construction. After all, the first ’’green house’’ in Serbia was made from the most astounding source of them all – cannabis stem.

This text is for informational purposes only and should not be considered legal advice. Should you require any additional information, feel free to contact us.

By Milos Velimirovic, Partner, and Anastasija Milosevic, Associate, Samardzic, Oreski & Grbovic