Category: Serbia

National Alliance for Local Economic Development (“NALED”) has submitted its proposal for the changes of the flat-rate taxation system to the National Coordination Body for Battling Underground Economy (“NCB”).  This Government body will review the proposed changes, which would substantially alter the system of flat-rate taxation of independent contractors (i.e. individual entrepreneurs) as it exists now, and have a particular impact on certain industries which rely on it to a great extent, such as the IT sector.

At the beginning of July, it was announced that NALED submitted its proposals for changing the flat-rate taxation system in Serbia, which the NCB will consider with the aim of developing a new system for this type of taxation in the second half of 2018. Although aimed at being neutral, the wording of some of the proposed changes inadvertently affects certain classes of contractors – especially those in the IT industry.

Fighting Employee Misclassification through Changes of Flat-Rate Taxation System

First of the proposed changes suggests the introduction of an electronic app through which it would be possible to automatically check whether a certain business activity can be subject to flat-rate taxation, and to calculate the exact amount of taxes and contributions that the contractor would be required to pay.

Secondly, it is suggested to redraft the list of business activities eligible for flat-rate taxation and introduce a limit so that individual contractors in flat-rate taxation system cannot obtain more than 80% of their income from one single client.  If this proposal is accepted, it will represent one of the first steps Serbia has ever taken with the aim of battling the phenomena of “employee misclassification” – hiring personnel as independent contractors when they effectively perform all duties as employees, in order to avoid paying for salary tax, healthcare, and social contributions.  While the US and European legislation have long ago recognized and started to fight employee misclassification, this is mostly done by introducing various misclassification tests, and not through the indiscriminate application of a single rule to all industries equally.

Other proposed changes primarily relate to the need to increase the efficacy of the tax administration, but also pertain to the possibility for newly registered independent contractors to be completely exempt from payment of taxes during their first year of activity.

Relevant industry associations have already voiced their concerns regarding some of the proposed changes, especially those which would affect work in IT, and it can be expected that they will influence the decision makers to a certain extent in terms of the final legislative solutions. For more information on how to prepare your business for the upcoming changes, do not hesitate to contact our lawyers.

Note: Newsletter cannot be construed as any legal advice given by SOG, but just a commentary regarding the Flat-Rate Taxation System in Serbia.

By Milan Samardzic, Partner, Sanja Dosen Krunic, Associate Samardzic, Oreski & Grbovic

As Serbia is gearing up for EU accession, harmonizing with EU legislation and business practices becomes not only mandatory, but also a market necessity. Although there are discrepancies between business practices in Serbia and in the EU, one thing seems to be unanimous: local businesses, just like their international counterparts, think ahead when it comes to securing their assets. This applies to every type of business, but it is prevailingly visible in local medium-sized to large businesses which predominantly handle and/or deal with IP portfolios. Nowadays, in the ever-evolving digital world, where almost information is at the reach of one’s hand – even to those located in remote corners of the world – attention and focus are being switched to ensuring the adequate protection of trade secrets. This process is happening in Serbia as well.

As trade secrets are considered valuable pieces of information and even valuable practices established within closed business systems, their value derives precisely from the fact that they are secret, and as such they afford their holders a certain leverage and competitive advantage over competitors in a given field.

Unlike classic intellectual property rights, which, with the exception of copyrights, are subject to a set of highly regulated formalities ensuring their protection, because trade secrets are not formally protected, careful handling of them becomes that much more important. As businesses often process a wide range of data such as customer and supplier lists and future business development and market strategy plans on top of their regular IP portfolios,the implementation of adequate mechanisms of protection against any type of misappropriation (either by theft, insider espionage, or a simple breach of confidentiality clauses) becomes of paramount importance.

Although Serbian legislation regulates the question of trade secret protection, it does so in an almost rudimentary way, by – among other things – simply defining what falls under the scope of a “trade secret,” offering protective measures based on the prior assessment of risks, and defining what falls under the scope of “illegal acquisition, use and disclosure of information.” In addition, there is also a clear lack of any supporting jurisprudence to fill in the gaps left by the legislator, thus depriving businesses of clear guidelines when it comes to improving their practices.   

However, with the implementation of the proposed EU Directive 2016/943 of 8 June 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure, planned for June 9, 2018, it seems that the joint efforts of the EU Commission, the EU Parliament, and the EU Council to unify disparities in legislation – and therefore practices regarding adequate protection of trade secrets across the states – will not only come to fruition to the benefit of its members states, but will also come at just the right moment for non-EU member countries like Serbia as well. 

As mentioned above, therefore, observance of the new EU legislative improvements should not only be deemed mandatory for countries like Serbia that are well on their path towards EU accession, but should also be welcomed as providing more advanced solutions to the loopholes left in current regulatory frameworks. 

Since the Directive is designed to offer a more balanced and stable environment for inventors and investors alike, with more unified implementation rules and more stringent sanctions, we are hopeful that it will have an impact both within and outside of the EU borders by further eradicating unfair competition practices and creating a more fertile ground for the safe development and safe sharing of innovative ideas.  

By Dragomir Kojic, Partner, Tamara Bubalo, Associate, independent attorneys at law in cooperation with Karanovic & Nikolic   

This Article was originally published in Issue 5.5 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Until a few years ago, the narrative within legal practices, as in most service industries, focused mainly on austerity, small growth numbers, and the crises. Most legal practitioners feared an uncertain future and all the risks it held, including evolving client expectations, financial pressure, and the long-term impact of the global economic crisis.

Speaking from today’s perspective, those fears seem to have been unjustified. The most recent global economic indicators and data speak in favor of optimism, as the largest global economies are performing well in terms of GDP growth and declining unemployment. Deal reports show that the opening quarter of 2018 – increasing by 18% over Q1 2017 to reach USD 890.6 billion – is the best performing in decades.  

The relevant data supports the same optimistic narrative in the CEE region. Economic indicators are definitely improving across the region, even in those countries which were hardest hit by the global economic crisis. The negative effects of austerity have definitely subsided and regional practices seem to be growing. Deal reports show that we are witnessing record-breaking numbers in terms of deal count and value in the first quarter of 2018 (for example, Mergermarket reports EUR 12.1 billion deal value in Q1 2018 in its CEE and Russia report, the best performing opening quarter since 2013).

All of this translates well throughout legal practices: global firms are achieving record profits and revenues, while confidently expecting even more growth, as evidenced by frequent lateral hires of star partners on both sides of the Atlantic. The exchange has become so obvious that The Financial Times felt it newsworthy, reporting in a recent article that even the most conservative firms in London are abandoning the lockstep financial model to retain their star partners or bring in new ones. In 2016 and 2017, most firms increased associate salaries for the first time in over a decade. Contrast that with the massive trends in outsourcing from 2008 and the picture becomes clear: behavior in response to market upsets is predominantly reactive, and we should be happy that the crisis is behind us. 

As lawyers and business people, we get entangled in thinking mostly about short-term trends. Most of these above-mentioned indicators have performed well in the past too, and most of the records that are broken today date back to 2006 or 2007. Do not take this the wrong way – I am not making a case that another crisis lies ahead, since much of this optimism is translating into investing in legal practices and improving the way we serve our clients and communities. Clients are re-recognizing the value of high quality service (contrary to the expectations of price pressure and the commoditization of service). Legal talent is again embracing the culture of legal practices (contrary to the fears of millennial invaders hacking the law firm concept and the overall professional services culture)

However, a case should be made for thinking even further ahead to what our clients will expect next and what we should do as lawyers and leaders in our fields. The time for long-term thinking is now. We are enjoying the benefits of all the positive economic trends, but the memories of the past crisis remain fresh. Client expectations are increasing through both boom and bust cycles. Finally, young lawyers are smarter than ever, and the gap between star partners and juniors is closing. The sooner all of these challenges are met with robust planning, the more relevant our profession will remain in the years to come.

The first step towards long-term planning is embracing several aspects of the business culture of the new generation (and I am intentionally avoiding references to the “start-up mentality,” with all the bad credit it gets). In terms of structure, it means developing strategies focused around people and introducing forms of profit sharing to ensure that lawyers are faced with how clients value their work from early on. It also means abandoning strict hierarchy structures in favor of more direct pathways from junior to the most senior positions (for both lawyers and non-lawyers), and introducing far more flexibility and openness for female partners. In terms of processes, it means the introduction of more algorithmic thinking, focusing on iterative processes while serving clients (for example, allowing clients access to early drafts of our work in order to both ensure that their explicit (not assumed) expectations are met and increase efficiency).

If the question is what to do now, my answer is simple. Spend a day at an IT incubator or at a start-up conference. Become a member of digital initiative (just like Karanovic & Nikolic became part of the Digital Serbia Initiative) and use your legal expertise in service of digital transformation. Offer help to a start-up or scale-up without expecting anything in return. Allow your lawyers (and other employees) exposure to the new culture and provide them with pathways to management. 

By Rastko Petakovic, Senior Partner, Karanovic & Nikolic

This Article was originally published in Issue 5.5 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Staying compliant with applicable legislation requires constant tracking of new legislation while staying on top of amendments to existing regulations. When employers are not compliant, they risk being fined. No exceptions are made for labor legislation.

Like other regulations, Serbian labor legislation envisages compliance monitoring through specific authorities (e.g. labor inspectors). Since the purpose of compliance monitoring is primarily to determine the potential existence of a compliance breach, employers must be up-to-date with any regulatory changes in order to avoid the risk of being fined.

In the upcoming period, employers should specifically pay attention to the Rulebook on the method of providing first aid, the type of assets and equipment that must be provided at the workplace, the manner and time frame for training of first aiders (“Official Gazette of RS”, No. 109/2016) (hereinafter: the “Rulebook”), which came into force on 7 January 2017.

The Rulebook introduced a set of obligations for employers related to first aid in the workplace in order to ensure improved safety in the workplace and to reduce the number of workplace injuries. Although compliance with the majority of these obligations was enforceable immediately upon the entrance of this Rulebook into force, a two-year grace period was given for certain requirements, specifically for the organization of first aid training for employees.

The due date for the first aid training is 7 January 2019. Below is a useful list of employer obligations for those who have still not trained their employees or who have ensured the use of funds and first aid equipment prior to this Rulebook, but are nonetheless obliged to align their business with it. Employers must ensure that:

first aid managers are trained, in addition to at least 2% of the total number of employees in one work shift or locally disposed unit, for basic or advanced training to provide first aid, depending on the estimated risk;

• at least one employee who has completed basic first aid training is present for each work shift and locally separate unit;
• at least one employee with completed advanced first aid training is present at an increased risk workplace;
• all employees are informed which employees are designated and trained to provide first aid;
• employees at increased risk workplaces are trained to be able to help themselves, provided that their condition allows this; and
• a wall cabinet or a first aid kit in work rooms and open spaces are provided (one cabinet or a carry-on first-aid kit, containing all means listed in the Rulebook, is sufficient for up to 20 employees. From 20 to 100 employees and for each next 100 employees, one additional cabinet or carry-on first-aid kit should be provided).

The Rulebook does not stipulate the maximum number of employees who should complete first aid training and be charged with the provision of first aid, meaning that an employer is free to determine this number autonomously, complying with the legally prescribed minimum. When making this designation, the employer should assess an employee’s ability to perform first aid, in particular when it comes to employees who were enrolled in advanced first aid training.

Regarding employee first aid training, the Rulebook sets out certain standards that the employer must meet. The first aid training should:

• comprise theoretical and practical training;
• be adapted to the assessed workplace risks; and
• be carried out according to the First Aid Training Program (Appendix 2 of the Rulebook), which contains the mandatory guidelines on topics that should be elaborated on through both basic and advanced first aid training. The content of the first aid training program must include basic first aid training for all workplace positions, and advanced first-aid training for high-risk workplaces.

Failure to ensure training for an appropriate number of employees for the provision of first aid, rescue and evacuation in case of danger is a misdemeanour, for which the employer could be fined a pecuniary fine ranging from RSD 800,000 to RSD 1,000,000 (approx.. EUR 6,750 – EUR 8,470), while the legal representative of the company may be held personally responsible and fined an amount ranging from RSD 40,000 to RSD 50,000 (approx. EUR 338 – EUR 422).

Although the risk of being fined may influence an employer’s motivation to comply with health and safety regulations, the welfare of their employees should always be their primary focus and main motivation. The sooner the first aid training is completed, the faster employees will be aware how to provide first aid and subsequently reduce the risk or occurrence of workplace injuries.

By Bojana Novakovic, Independent Attorney at Law Deloitte Legal

Need for Transparency

The Act on Centralized Record of Beneficial owners (hereinafter the “Act”), came into force on June 8, 2018. This is just one of the measures taken by Serbian authorities in order to enhance transparency of business in Serbia. The Act was enacted only a few months after Serbia was identified as a jurisdiction that has strategic anti-money laundering/combating the financing of terrorism deficiencies by the Financial Action Task Force – an inter-governmental body with the objective to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. The Act is just one in a range of measures taken by the Government of Serbia in recent months.

Centralized Record

The Centralized Record is a database of beneficial owners of companies registered in Serbia.  For the purpose of the Act, a beneficial owner is:

• a natural person having, directly or indirectly, a 25% or larger share of a company or is an owner of 25% or more of a company’s capital;
• a natural person with a prevailing influence on managing the business of a company;
• a natural person that provides, or has provided, funds for a company and therefore has a substantial influence on decision making in a company with regard to finance and business decisions;
• a natural person who is the founder, trustee protector or user, if appointed, as well as a person having a dominant position in a trust or another entity established under foreign laws;
• a natural person registered to represent a cooperative, NGO, foundation, endowment or an institution if the person authorized for representation did not report another person as the beneficial owner.

The Act applies to all types of companies from the Serbian Companies Act, except for public joint stock companies.

The Acts stipulates a criminal offense for trying to hide the beneficial owner or for entering false information into the Centralized Record, punishable with up to 5 years in prison and a misdemeanor for violating the deadline for registering the beneficial owner or not keeping the information about the beneficial owner.

Data

The Act stipulates that the data required is all-encompassing – detailed information on either a business entity (owners, capital, bank accounts), or on a natural person, including all personal information, but also the basis for acquiring ownership.

Existing companies have to determine their beneficial owners within 30 days from the day the Act came into force. When changes in the ownership structures are made, new data has to be determined and subsequently filed with the Serbian Business Register Agency (hereinafter the “SBRA”) as well.

All new companies will have to file information on beneficial owners with the registration forms.

The SBRA will maintain the Centralized Record and publish all the relevant information on its webpage.

The companies have to keep records on their beneficial owner for 10 years from the day of registering the data, and the SBRA will keep the record permanently.

Possible Consequences

The ratio for enacting the Act is clear since the transparency is becoming more and more important in the modern globalized world because of terrorism and money laundering.  However, existing experience shows that gathering data on beneficial owners, which was already requested by some banks when opening accounts, can be difficult and time consuming for complex business entities.  It is possible that the Act will slow down incorporation of new business companies in Serbia and turn away some prospective investors.

By Milan Samardzic, Partner and Dušan Dincic, Senior Associate, Samardzic, Oreski & Grbovic