Category: Serbia

According to a non-binding opinion delivered on September 20, 2022, by Athanasios Rantos, influential adviser to the European Court of Justice, antitrust authorities may also assess infringement of personal data protection rules during their investigations.

Connection between protection of competition and personal data

Namely, according to the subject opinion, although so-called antimonopoly authorities do not have a direct jurisdiction over the personal data protection issues, they are allowed to, within the enforcement of their authorisations, assess the compliance of market participants with regulations governing the respective matter (primarily GDPR), considering that the use of personal data of customers/users can lead to strengthening a dominant position on the market.

This opinion was delivered with reference to the measure imposed by German antitrust authority to Facebook platform owned by company Meta, which implies prohibition of personal data processing under the terms and conditions of the said company, considering that they are not in line with the GDPR and which the stated authority found to be an abuse of dominant position of this company in the German market.

After company Meta filed a complaint against the decision imposing this measure, the case was addressed to the European Court of Justice, whose decision is currently pending.

Abuse of dominant position in domestic legislation

The Law on the Protection of Competition (Official Gazette of no. 51/2009 and 95/2013) (“the Law“) stipulates that a dominant position is held by a market participant who, due to its market strength, may operate in the relevant market to a large extent independently in relation to actual or potential competitors, customers, suppliers or consumers. The market strength of such participant is determined in relation to the relevant economic and other indicators, in particular those indicated in Article 15, paragraph 2 of the Law.

In relation thereto, the Law prescribes the prohibition of abuse of dominant market position, which in particular involves:

direct or indirect imposing of unjust purchase or sale price, or of other unfair business conditions;
limiting the production, market or technical development;
applying dissimilar conditions to equivalent transactions with other trading partners, thereby placing them at a competitive disadvantage;
conditioning the contract with the other party accepting additional obligations, which by its nature or commercial practice have no connection with the subject of the contract.
The use of personal data done in contravention to the Law on Personal Data Protection (Off. Gazette of RS no. 87/2018) may also create unjustified competitive advantage for a market participant in the Republic of Serbia, hence it remains to be seen whether the competent authority of the Republic of Serbia (Commission for the Protection of Competition) will extend its practice in this domain.

By Lara Maksimovic, Senior Associate, PR Legal

In the last two months, the Commission for the Protection of Competition (“Commission”) initiated several different proceedings i.e., 3 gun-jumping cases, one for abuse of a dominant position and one case regarding restrictive agreements. It is necessary to pay attention to these proceedings, because they are not coincidences but rather are initiated due to Commission’s reasonable doubt that market participants have breached the Law on Protection of Competition of Republic of Serbia (“Law“).

Some of the proceedings that have been initiated could be seen and understood as milestone in the Commission practices, and as every other milestone, this one could show in which direction we could expect the Commission to act in future cases.

Multiple gun-jumping cases and first one concerning acquisition of foreign target company

The Commission has initiated investigation proceedings against Ananas e-commerce d.o.o. Beograd, part of Delta Holding, for an unnotified concentration regarding acquisition of 100% of shares in Vebspot doel Skopje, company dully incorporated and existing under the laws of North Macedonia.
The Commission considers that concentration notification should have been submitted taking into consideration that the total annual turnover of Delta Holding in the preceding year exceeded prescribed threshold of EUR 100 million on the worldwide market and over prescribed threshold of EUR 10 million on the market of the Republic of Serbia.
Unnotified concentration was discovered by review of the headlines published on the website of Delta Holding, whereafter the Commission investigated and found out that ownership change over Vebspot doel Skopje was registered in North Macedonia as well as that concentration notification has been submitted to competition authority of North Macedonia.
Furthermore, it is highly important to note that this is the first investigation which concerns an acquisition of the target company not registered in the Republic of Serbia, thus this could possibly mean that the Commission has decided to take a closer look at transactions which are conducted abroad by market participants which are present in the Republic of Serbia and therefore could present important precedent for all future transactions.
In addition to the case regarding Ananas e-commerce, two gun-jumping cases were initiated by the Commission against company Dobergard doo Beograd, present on the market of provision of security services. Cases were initiated for two separate acquisitions, one over company Protecta Group doo Beograd and other over company Sparta Security doo Beograd, both active on the same relevant market as a Dobergard doo Beograd.
Using publicly available data, the Commission has discovered that ultimate beneficial owner of Dobergard doo Beograd has control over several other entities on the market of the Republic of Serbia and that their combined annual turnover in 2021 met the turnover thresholds, hence, the Commission took a standpoint that concentration notification should have been submitted.
Moreover, in the so far Commission’s practice, total of 7 proceedings were initiated for the implemented concentrations without the Commission’s approval, and 3 of them were initiated in the last 2 months, which shows a significant increase of control and investigation by the Commission.

Abuse of a dominant position on the market

The Commission has initiated procedure against Glovo Technology d.o.o. Beograd for alleged abuse of dominant position on the market of delivery services. The Commission claims that Glovo holds a dominant position on the market, following its acquisition of one of the largest delivery platform Donesi in 2021.
Prior to initiation of the procedure against Glovo, the Commission has conducted a Sectoral analysis in digital platforms for intermediation in sales and delivery of goods. During the analysis of the agreements that were submitted during the Sectoral analysis, the Commission identified the provisions that may represent an abuse of a dominant position on the market, particularly exclusionary abuse, that may result in excluding or hindering the expansion of other platforms, as well as the abuse that could lead to potential discrimination of partners by applying unequal business terms.
Also, by reviewing the agreements executed by Glovo with individual restaurants, as well as the general conditions of business “Terms for Glovo partners”, the Commission has noticed certain provisions of the agreements that could be deemed to have clauses that may serve as incentive for the restaurants to have exclusive cooperation with Glovo such as prescribed fees that restaurants need to pay if they enter similar partnerships with another platforms. Also, individual restaurants are being offered large sums in the form of investment for the marketing purposes, with the highlighted obligation to return the received sum if cooperation with another platform is established.

In addition to the above stated potential abusive clauses, there are also unfavorable conditions for termination of the agreement prior to its expiration date, penalties in case of violation of this deadline i.e., prohibition of termination for the first 12 months and then notice of termination at least 120 days before termination.
By including exclusive clauses in agreements with partners or various forms of incentives or pressures to maintain exclusivity, could exclude competitors from the market or reduce their ability to compete, which could ultimately lead to a possible higher price on the market, less choice for consumers and lower quality of the offer itself.
In the light of the above proceedings, it is important to note that these kinds of proceedings against the food/product delivery platforms, i.e., their relationship with their partners (restaurants, shops, etc.) are common in European competition practice, having in mind that multiple proceedings have already been conducted in various countries. Some of those proceedings have ended with delivery platforms changing their agreements and clauses which were deemed to be restrictive, but there were also examples in which competition authorities determined that the agreement does not restrict competition on the relevant market. Regarding the case in Serbia, it will be important to see which way the Commission shall lean and what kind of decision shall render in this case, because, that decision may set a precedent for future relations between the delivery platforms and their partners, and shall maybe play significant role for some other companies when deciding whether to enter the market of the Republic of Serbia.

Resale price maintenance on the market of Apple products

The Commission has initiated proceedings for resale price maintenance against related undertakings, Apcom CE from Hungary and Apcom Distribution doo Beograd, distributors of Apple products for the Republic of Serbia, after analysis of the competition conditions on the market of Apple products in the Republic of Serbia. The Commission has determined that the prices at retailers in the Republic of Serbia are the same, regardless of whether the retailers have certain status as an Apple authorized reseller or not, as well as regardless of the way sale is conducted, brick-and-mortar stores/retailers or online.
Not for the first time in its practice, the Commission has compared product prices in Serbia with prices in neighboring countries. In this specific case, the Commission has compared the retail prices of iStyle doo Beograd with prices in nine countries where iStyle is also present. The Commission has determined that the prices are higher in the Republic of Serbia, while at the same time are almost the same at all retailers in the Republic of Serbia.
Having in mind all above stated, the Commission has assumed that stated leads to breach of competition by determining the resale prices in the Republic of Serbia by Apcom CE and Apcom Distribution and initiated ex officio investigation proceedings.

Conclusion

For all the above-mentioned alleged breaches of Law, a pecuniary fine of up to 10% of total annual turnover generated in the territory of the Republic of Serbia could be imposed against the market participant which committed infringement.
Additionally, if a concentration has already been implemented, and the concentration has been declared incompatible with the provisions of the Law or, has been implemented in contrary to the conditions prescribed by the Law, the Commission may instruct the acquirer to unwind the concentration, sell shares, terminate an agreement and/or take other measures deemed to be necessary for establishing and preservation of the competition, i.e. measure of de-concentration.
Considering all the above different procedures initiated by the Commission in the last two months against the various market participants, and severity of fines prescribed by the Law which may be imposed consequently, it is highly important for all participants on the market to analyze agreements they conclude and transactions in which they participate, as well as to undertake all measures which will ensure that they are compliant with the Law.
This practice of the Commission can be interpreted as a conduct pattern as well as a new trend, which is stepping up in its enforcement activity within all areas of antitrust and competition. Moreover, the Commission plans to even further analyze and initiate proceedings in all situations when there is a possibility that the provisions of the Law have been violated, hence, , there is a need for all market participants to comply their business activities with the Law, not waiting for the Commission to act within the scope of its authority and upon initiating ex officio proceedings, and potentially imposing severe pecuniary penalties and other legal actions which can slow down the planned economic growth of various participants on the Serbian market.
In order for companies to minimize the possibility of breach of competition regulations in their business operations, it is important that every employee, especially those who are exposed to the risk of potential breach of regulations, should be familiar with the basic competition rules i.e., that they should be able to recognize situations that could put them and the company at risk of breach or, to consult with a lawyer experienced in the field of competition protection whenever a dilemma arises regarding the application of competition regulations or, if any of the risks to the company’s operations are noted.

By Nikola Poznanovic, Partner, Zivko Simijonovic, Senior Associate, Luka Hajdukovic, Associate, JPM Jankovic Popovic Mitic

Keeping investments in or out of line with the development of the IT sector.

In the last 15 years, the Serbian IT sector reached significant growth. From sole traders/entrepreneurs, agencies, to smaller companies that provide services through “outsourcing” to clients in Western Europe and North America, the IT sector has developed with service-related companies that export services worth over EUR 1.7 billion, with an annual growth of 30% and, globally successful companies developing complex technological products and operating in large worldwide markets.

By virtue of the programs for the accelerated development of the startup ecosystem and the orientation of service-related companies towards providing services with great added value, Serbia is in an excellent position to become a leader in this domain. Companies had modest funds at their disposal when established, so outsourcing to Western Europe and North America was a logical path as the most profitable solution. During the last 15 years, first gradual and then sudden transformation of the IT sector occurred, due to the expertise of people from high-quality technical faculties in Serbia, but also through informal education and excellent knowledge of the English language, which contributed to the easier cooperation and  creation of additional value on the market. Due to these reasons, the Serbian IT sector exported services with an excellent quality-price ratio. Domestic IT services market reached a value of around EUR 300 million and is growing annually, while the export of IT services in 2021 amounted to EUR 1.73 billion, which is an annual growth of 30%. In 2016, Serbia was in 42^nd place, and it is expected to reach 35^th place in 2021, according to information from the World Trade Organization.

“alternative” investing in the IT sector

This growth trend is certainly recognized by the legislator with numerous tax incentives, primarily for innovative creators of products and services such as startups, as well as their necessary financial development. The development itself, through the investment mechanism, among others, is established by the solutions of the Law on Alternative Investment Funds (AIF Law) which, among other things, regulates the establishment and management of alternative investment funds, as well as the incorporation, activity and operations of companies managing alternative investment funds. AIF Law defines an alternative investment fund (AIF) as an investment fund that collects funds from investors with the intention of investing them in accordance with the established investment policy for the benefit of those investors, and for which a license is not required, in pursuant with the Law on Open-End Investment Funds subject to Public Offering.

Furthermore, AIF Law also defines the company for the management of alternative investment funds (AIF Company) as a legal entity registered in the Republic of Serbia whose regular activity is the management of one or more AIFs based on an approval license issued by the Securities Commission (Commission), in accordance with that law.

Commission maintains a public register for AIF and AIF Company. AIF Company is established as a limited liability company (LLC) or a joint-stock company (JSC), which is not a listed company in the sense of the law governing the capital market (exceptionally, it can also be established as a two-tier managed JSC). This enables somewhat more flexible access to the market, considering that the incorporation and management of LLCs and non-listed JSCs is much easier whereas it is not subject to strict control by Commission. Also, non-listed JSC does not have the obligation to submit a request for the inclusion of its equity securities in trading on the regulated market managed by the market organizer (stock exchange) nor it is, to full extent, subjected to provisions of the Capital Market Law (CML,) which apply to listed JSC. Therefore, with a non-listed JSC, no public offering and issuance of shares is required, no obligation to prepare a prospectus for the offer in accordance with CML, etc.

The provisions of the Company Law (Company Law) apply to AIF Company and the provisions of CML, unless the AIF Law prescribes otherwise, meaning that AIF Law exclusively regulates part of this ecosystem, which is a fertile ground for the development and progress of startups and technological businesses. However, LLC and JSC are in principle incorporated, managed, and operate in accordance with the Company Law considering the characteristics of these legal forms of companies.

AIF and AIF Company represent what is known in the financial world as “Venture Capital Funding” or “VC Funding”. In domestic area, such terms would be translated as “entrepreneurial capital” or “risk capital”. However, this terminology does not reflect the purpose of this very method of financing, as it deters potential investors from startups (as a type of risky venture), which the Serbian market still perceives as an a priori unsafe investment, and therefore insufficiently regulated (or at least it used to be). Nevertheless, it is a fact that in recent years this type of investment has been formalized to a greater extent, which gradually develops and achieves financial goals in the IT sector as a type of initial investment which is necessary for numerous technological startups and other business undertakings. The new Law on Innovation Activities strives to somehow change that negative perception by defining these entities as investors in innovation activities who invest financial resources in startups, i.e., as the law symbolically designates them as “business angels”. The initial investment is oftentimes insufficient for sustainable business development. The IT sector stimulated with the initial investment usually has no significant obstacles to move to a wider market through the “outsourcing” model (low transactional costs, aggressive marketing and sales, development of the Internet and social networks, efficient communication, etc.) and, in the end, to the final sale of the entire business and/or shares/stakes in a company (Exit).

Each individual financing venture, when carried out by AIF Company managing AIFs and other investors, represents a comprehensive process based on various verification actions (Due Diligence) as well as on the functional cooperation of startups-applicants, investors and possibly engaged third parties if required for contemplated investment. Due Diligence includes several main categories conducted with the support of experts from respective fields such as technical, financial, market, tax, and legal analysis. The targeted issues within those categories are business and social reputation, skills/experts’ team, investment timing, sales/marketing, product viability, intellectual property rights protection and preservation followed with other related legal issues, income-costs ration (“burn rate”), social impact, competition on relevant markets and Exit potential, i.e. an opportunity for the future sale and monetization. For a rising startup or other investment-seeking entity to be brought to an end of this rather, comprehensive process, experts from different respective fields are required always when the financial efficiency accompanied with law compliance is the goal of such undertakings.

Tax incentives

In addition to the created ecosystem where investing entities (AIF, AIF Company) operate, legislation in the Republic of Serbia also contributes to sustainable development through tax incentives and reliefs.

R&D costs deduction

The Law on Corporate Income Tax (LCIT) provides an incentive in the form of the possibility of excluding 80% of qualified income from the tax base (consequently reducing monetary tax liability). Qualified income is the income that a person/entity realizes as a holder of copyright or related rights based on the fee for the use of a deposited work of authorship or subject of related rights registered by depositing it in the register of the competent authority (LCIT refers therewith to the Law on Copyright and Related Rights as the organic regulation). Qualified income is excluded by first reducing the income for tax-deductible expenses related to research and development activities that resulted in the creation of that work of authorship or subject of related rights (qualified expenses).

It is required to keep accurate records of all relevant income and expenses, and qualified income must be separately stated in the taxpayer’s tax balance sheet. This is often neglected by the rising startups and business undertakings but can be of crucial importance (apart being mandatory by LCIT) when one does strive towards efficient business paved with smart tax planning while not just seeking the ‘’bail-out’’ from investors. Moreover, keeping accurate records while complying with the law and tax planning shall transmit appropriate signal for AIF Company and other investors. The right to use this incentive is not available when application for invention is rejected by the competent authority, and if the submitted application is rejected, used reductions must be withdrawn from the tax base (tax base correction) in the respective tax period.

Tax credit when investing in ‘’newly incorporated companies conducting innovative activities’’ 

Further, LCIT stipulates that a taxpayer which cannot be considered a ‘’newly incorporated company which conducts innovative activities’’ (e.g. startups and other business ventures), and which invests in the capital of such newly founded company which conducts innovative activities, is granted the right to a tax credit in the amount of 30% of investment. The maximum amount of the tax credit thereof is RSD 100,000,000.00, and regardless of the number of investments on account of company’s income tax in one tax year, is RSD 50,000,000.00.

LCIT defines a newly incorporated company which conducts innovative activities as any company whose incorporation has not been more than 3 (three) years old, and which predominantly conducts innovative activities in the sense of the Law on Innovation Activities, i.e. undertakes activities for the creation of new products, technologies, processes and services or significant changes to existing ones, in accordance with the market requirements, and which meets (cumulatively) the following conditions:

• annual income according to the latest financial reports does not exceed RSD 500,000,000.00;
• since its incorporation, it has not distributed dividends, i.e., profit shares, and will not distribute them for a period of three years from the date of investment;
• the center of business activities is located on the territory of the Republic of Serbia;
• did not result from a status change in accordance with the Company Law;
• in each tax period, starting from the first following period from the period representing the moment of incorporation and ending with the period when the full payment of monetary contributions was made:
• research and development costs make up at least 15 percent of the total recognized expenses, or
• highly qualified employees make up more than 80 percent of all employees, or
• is the owner or the user of the deposited work of authorship or patent that is directly related to the innovative activity it performs.

The taxpayer (i.e., investor in newly incorporated company for innovative business activities) can use the tax credit in the first tax period following the expiration of 3 (three) years from the investment. The unused part of the tax credit can be transferred to the company’s income tax account for future accounting periods, but not longer than five years. Both R&D costs reduction and tax credit may be used and are usually intertwined when it comes to conditions and terms of exercising it. Mechanisms of implementation, application, closer conditions of tax incentives and ways of exercising the right to tax credits, methods of excluding qualified income from the profit tax base and recognition of expenses related to R&D are regulated by secondary legal acts – rulebooks.

It is obvious that, with the rapid development of the IT industry in Serbia, both in terms of the model and way of doing business and in terms of the profits that the industry brings (including the export potential of service providing), applicable legal solutions are also progressing as a necessary legal framework for investment, development and sale of IT products, services, and ecosystems as a whole. The abovementioned is part of the legal regulation that has a positive impact on the IT sector. However, there are numerous issues that are not sufficiently clarified in practice and that have a significant financial and strategic impact on IT, such as the participation of employees and members of the company’s management body in the company’s ownership structure, incentives for employees, bonuses, reserved own shares of the company and financial instruments – the right on acquiring shares in the company and similar. The relevant applicable legal regulations in Serbia already provide a sufficient legal framework and basis for implementation, while its individual actors are waiting for a “safe” moment in order to keep pace with the rise of this industry.

By Aleksandar Popovic, Partner, and Milos Maksimovic, Senior Associate, JPM Jankovic Popovic Mitic

Continuing our series on opportunities for investment in Serbia, we discuss the real estate sector.  Historically, countries have been reluctant to allow foreigners to acquire real estate. In the past, real estate (primarily lands) symbolized its owners’ power, and today apartments, buildings, houses, properties, mines, and fields have significant worth. Nevertheless, globalization has increased the dynamics of “international” real estate trade. Real estate has thus become an important segment in international investment, both as a secondary part of the project (leasing or even buying space for the investors’ regular business operations) and as the very purpose of the investment (real estate construction, exploitation of mineral resources, construction of roads, etc.). As discussed in our previous articles, Bilateral Investment Treaties (“BITs”) play a crucial role in encouraging and securing foreign investors to invest in a foreign country, this time in real estate.

The purpose of BITs is to provide a variety of safeguards to international investors and to ensure that their investments are not “taken away” in a foreign jurisdiction. One of the mechanisms is the possibility of initiating arbitration proceedings against the investment host country.

Serbia has 53 signed BITs (45 of which are currently in force) with numerous countries across the region, most countries of the European Union (“EU”), as well as with significant trade partners – the United Kingdom, Canada, the United States, Russia, and China.

Regarding real estate, it is essential to point out that most BITs contain a provision by which the investing country guarantees the investments will not be nationalized, expropriated, or subjected to other measures that have the same effect as nationalization or expropriation. Nationalization occurs when the government decides to take over a company or real estate based on the rules (values) it establishes (for example, the case of the nationalization of the YPF company in Argentina). However, BITs themselves foresee an exception to the ban on nationalization/expropriation if: (i) it is in the public interest, (ii) the investor is not subjected to any discrimination, (iii) the expropriation is carried out under the law and (iv) the investor receives appropriate compensation.

International investment relations and real estate sector

A foreigner (foreign investor), whether a natural or a legal person, can buy and invest in real estate in Serbia, provided that Serbia has reciprocity with the foreigner’s country, which means that Serbian citizens can freely acquire (buy, rent, use) real estate in another country in the same way as citizens of that country can do in Serbia. According to the official information provided by the Ministry of Justice, Serbia has reciprocity with over 70 countries worldwide.

With certain countries, Serbia has contractual reciprocity (reciprocity confirmed in an international bilateral agreement). In contrast, in the case of countries with no reciprocity established in such a way, it is based on legal regulation (bylaws of other countries have provisions on the condition of reciprocity) by exchanging notes.

EU – The Stabilisation and Association Agreement (“SAA “) sets the framework for the relationship between Serbia and the EU in this area. It prescribes that Serbia will allow EU Member States’ citizens to acquire real estate in Serbia. The Agricultural Land Act defines an additional benefit for EU citizens, allowing them to acquire agricultural land under certain conditions.

Furthermore, the SAA envisages cooperation between the contracting parties in the field of promotion and protection of both domestic and foreign investments to create a favorable atmosphere for private investments, which is crucial for the economic and industrial revitalization of Serbia. Considering that the EU Member States such as Germany, Italy, Hungary, Romania, Poland, and the Czech Republic are the largest trading partners of Serbia, this agreement is an essential mechanism for the successful enforcement of investment projects in Serbia.

The USA – Bilateral relations between Serbia and the United States date back to 1881 with the signing of the Treaty of Commerce between the United States of America and Serbia. Motivated by a desire to facilitate and strengthen economic relations, the contracting parties to this treaty included, among other things, provisions for the Most favored nation’s treatment in the ownership of immovable property. Even though it entered into force nearly 140 years ago, the treaty has withstood the test of time, and economic relations between Serbia and the USA are continuously progressing.

UAE – Political and economic relations between Serbia and the United Arab Emirates (“UAE”) are at a very high level, confirmed by the agreement on cooperation between the Government of Serbia and the Government of UAE. An essential part of this agreement is cooperation in the field of investments, which implies joint work on various administrative, legal and financial capacities and all necessary procedures when establishing collaborative investment projects for both contracting parties. This agreement also provides cooperation in the real estate field, demonstrated in the acquisition of state-owned real estate. To carry out activities in this area of cooperation, Serbia is obliged to sell immovable property to subjects from the UAE or invest together with them when mutual interest is recognized.

Israel – Investors from Israel have had a significant role in the real estate market. Since 2000, the real estate sector has been the most prominent part of Israeli investments. In that regard, Serbia and Israel have signed numerous agreements, such as the Agreement on Trade and Economic Cooperation and the BIT Agreement.

The interesting fact is that there is no reciprocity between Serbia and North Macedonia in the ownership rights of real estate.

Registering the rights of ownership on immovable property in Serbia

When acquiring, changing, and losing rights to immovable property in Serbia, Serbian law is exclusively applied, regardless of the nationality of the contracting parties and other seemingly important factors. Therefore, it is essential to emphasize that registering ownership rights in Serbia’s Real Estate Cadastre (“Cadastre”) is significantly simplified and expedited. For real estate sales contracts, which the seller and the buyer must sign before a public notary, to register their ownership, the seller and the buyer do not have to go to the Cadastre physically. Instead, the public notary will electronically send the contract to the Cadastre within 24 hours beginning the day of entering into a contract. The Cadastre is then obliged to register the change within five days, starting with the day of delivering the documentation by the public notary. In addition, the seller and the buyer have no obligation to go before the National Tax Authority since public notaries will also fill out the tax declarations and submit them electronically to the National Tax Authority.

Conclusion

In the past several years, the real estate market, infrastructural projects, mining, and construction have seen significant growth in Serbia.

Foreign and domestic investors equally participate in this market, which shows, among other things, that foreign investors have already gained trust in the Serbian market and that they freely invest in real estate projects in Serbia. In addition, the city of Belgrade has named the city with the greatest economic potential in a selection involving 23 countries in the wider region, which only further indicates the dynamic development of the Serbian market, and that long-term projects, such as in real estate, truly make a lot of business sense.

By Nemanja Sladakovic, Senior Associate, Marko Djordjevic, Associate, and Milos Petakovic, Senior Associate, Gecic Law

Karanovic & Partners, working alongside Baker McKenzie, has advised Colt Technology Services on its acquisition of Lumen Technologies’ Europe, Middle East, and Africa business for USD 1.8 billion. Bryan Cave Leighton Paisner reportedly advised Lumen Technologies.

The Colt Technology Services Group Limited is a multinational telecommunications company headquartered in London. 

Lumen Technologies is an American telecommunications company headquartered in Monroe, Louisiana, that offers communications, network services, security, cloud solutions, voice, and managed services.

The Karanovic & Partners team advising on Serbian aspects of the transaction included Partner Milos Jakovljevic, Associate Stefan Savic, and Junior Associate Ljubica Stojanovic.

Former PwC Director Dragan Lupsic has joined Heineken Srbija as Corporate Affairs Director.

Lupsic spent a year and a half with PwC before joining Heineken. Earlier, he spent almost ten years with Coca-Cola, joining in 2010 as the Legal Director for Serbia before stepping into the roles of Public Affairs & Communications Director, in 2015, and Premium Spirits, HoReCa and New Channels Development Director, in 2018. Earlier still, he spent over four and a half years with JTI, between 2006 and 2011, after starting his career as a Legal Advisor with US Steel Kosice in 2004.

Originally reported by CEE In-House Matters.

On November 10, 2022, the European Parliament finally adopted the Corporate Sustainability Reporting Directive (“CSRD“). The CSRD intends to expand the application of corporate sustainability standards across the market by including an even larger specter of business entities compared to the application scope of the Non-financial Reporting Directive (“NFRD“).

NFRD applied only to large companies with more than 500 employees. In contrast, the CSRD comes with larger ambitions and will apply not only to large companies but also to listed SMEs and third-country companies with significant operations on the EU market and a daughter company or a branch office in the EU. In addition, the CSRD lowered the threshold for large companies, resulting in a significantly broader inclusion. Companies will be obliged to compile sustainability reports, which will be subject to audit and must be publicly available for free. Of course, many delegated acts are yet to come.

What does this mean? Firstly, the reporting rules due to the NFRD currently include around 11.700. The adoption of CSRD will increase coverage to nearly 50.000 companies, which is a significant step in boosting compliance with ESG standards. The introduction of the CSRD should enable investors to have comparable data and reliable information about companies’ ESG performance and significantly contribute to ending practices such as greenwashing in the EU.

Secondly, all the reports, which will now be required to be more detailed, will have to be audited to ensure their reliability.

Thirdly, all the reports will be digitally available, making it easier for all interested parties to access them.

What are the next steps? The Council will adopt the CSRD on November 28, 2022, after which it will be signed and published in the EU journal. After 20 days from publishing, the CSRD will enter into force, and the rules will likely apply between 2024 and 2028.

By Milica Novakovic, Associate, Gecic Law

An updated version of the Technical Guideline for Administrative and Technical Overview of Functionalities of ESIR or L-PFR – Version 1.14 (“Technical Guideline”) was published on the website of the Tax Administration on October 25, 2022.

Namely, considering the questions that frequently emerged in practice since the beginning of application of the Law on Fiscalisation (Off. Gazette of RS no. 153/2020) on January 1, 2022, which replaced the Law on Fiscal Registers (Off. Gazette of RS no. 135/2004 and 93/2012) and introduced a completely new model of fiscalisation, this updated Technical Guideline eliminated several uncertainties with regards to:

• issuance of fiscal invoices for advance payments prior to the application of eFiscalisation system;
• keeping records of the sale of single-purpose vouchers and their using; and
• issuance of fiscal invoices for free-of-charge turnover.

Below is an explanation of the respective changes.

Issuance of fiscal invoices for advance payments prior to the application of eFiscalisation system

As for the registering of advance payments, as well as their closing upon issuance of a fiscal invoice for a completed transaction, there is a specific situation when the advance payment has been partly or completely received prior to the application of the new fiscalisation model.

According to the updated Technical Guideline, upon closing (several) advance payments effected prior to the application of new eFiscalisation system, reference number of the last issued advance payment invoice is entered into the document Advance Refund, as well as the total amount of advance payment. However, if advance payments were partly done prior to the beginning of registration of transactions through new fiscal devices, and partly following the start of application of the new model, the Technical Guideline specifies the method of connecting fiscal documents.

Keeping records of the sale of single-purpose vouchers and their using

Pursuant to the updated Technical guideline, upon using of single-purpose vouchers no fiscal invoice shall be issued, but a receipt in terms of the regulations on trade or another accounting document outside the fiscalisation system.

Issuance of fiscal invoices for free-of-charge turnover

As regards this issue, it is considered that any free-of-charge turnover which, under the law governing the VAT, is equalised with charged transactions, shall be registered through fiscal devices.

Accordingly, i.e., in line with the Technical Guideline, the fiscal invoice shall include all of the prescribed elements, along with the following specific details:

• in the field Name, before the name of the article, code 00: shall be entered (two zeros and a colon); and
• in the field Manner of Payment, other non-cash form of payment shall be entered.

This article is to be considered as exclusively informative, with no intention to provide legal advice. If you should need additional information, please contact us directly.

By Lara Maksimovic, Senior Associate, PR Legal

If one takes into account the applicable Law on Companies of the Republic of Serbia, every branch office, including a branch office of a foreign legal person, represents a separate organizational unit of a company through which such company conducts its business activities in Serbia. A branch office does not hold the status of legal person, it only acts in the name and on behalf of the company that founded it, in the respective legal transactions of the company.

Having in mind this definition, it may be determined that a branch office as such does not represent an independent entity, i.e. an entity that falls under the scope of application of domestic laws as such, independently from the (foreign) company – its founder. The diligent application of this definition would require that the (foreign) legal person – the founder of the branch office is the subject of rights and obligations in the Republic of Serbia, which obligations may be settled through its organizational unit – branch office in the Republic of Serbia, this especially in the context of obligations towards the entities in public sector, to which the business of the branch office is, in reality, available. 

So, regardless of the fact that a branch office as such does not have the status of a legal entity, in case of a branch office of a foreign company in which name and on behalf of which the branch office acts in the Republic of Serbia, such branch office still represents a subject/an entity to which the laws and regulations of the Republic of Serbia may apply directly, having in mind that only a branch office is available to domestic authorities, while the foreign legal persons is not.

This is especially noticeable in the context of application of tax and accounting related rules and regulations, which define a branch office of a foreign legal entity as specific subject of application of these regulations, all in order to ensure control of business activities and due performance of obligations within the territory of the Republic of Serbia of a foreign legal person in which name and on behalf of which the branch office is acting in the Republic of Serbia.

Accordingly, the applicable Law on Accounting prescribes that a branch office of a foreign legal person (and other organizational units of a foreign legal person) in the Republic of Serbia is the subject of application of this law. So, for the purposes of application of this law, the size and volume of business activities of the branch office in the Republic of Serbia is evaluated and branch offices are categorized as micro, small, medium or large legal person, regardless of the size and volume of business activities of their founders which are outside of the Republic of Serbia. A branch office of a foreign legal person is directly obliged to prepare and submit financial statements in accordance with the laws of the Republic of Serbia.

Similar as the Law on Accounting, the tax related laws and regulations also apply directly to the branch office of a foreign legal person in the Republic of Serbia. Accordingly, the branch office is directly obliged to submit tax returns, tax calculations and tax balances.

From the perspective of the Law on Corporate Income Tax, a branch office of a foreign legal person represents a permanent business unit of that legal person in the Republic of Serbia, whereby such legal person falls under the scope of application of corporate income tax for the corporate income accrued from the business activities in the Republic of Serbia, through its branch office. 

However, when it comes to the interpretation of tax related rules and regulations and their application in regard to a branch office of a foreign legal person, especially in regard to relations, i.e. transactions between the mother company – a foreign legal person and its branch office, and the matter of recognition of expenses that occur in connection with these relations, the situation is not all that clear and various dilemmas may arise in practice. 

The matter of recognizable expenses of a branch office of a foreign legal person in the Republic of Serbia

Having in mind that a foreign legal person that conducts business activities in the Republic of Serbia through its branch office is a tax payer in the Republic of Serbia in regard to the profit (corporate income) accrued through its business within the territory of the Republic of Serbia, the question arises: which expenses connected with the business operations in the Republic of Serbia may be recognized in favor of a foreign legal person (i.e. its branch office) for the purposes of determining taxable corporate income? 

On the general level, it is undisputable that these would be the expenses incurred in the Republic of Serbia (e.g. costs of suppliers/service providers in the Republic of Serbia, costs of personnel engaged in the Republic of Serbia, and similar), as well as the costs incurred in connection with procurement of goods and services abroad, which the foreign suppliers/service providers invoiced directly to the branch office, or which were procured directly and exclusively for the purposes of conducting business in the Republic of Serbia.

However, besides these expenses, there are other business-related expenses that occur in the course of business operations of the branch office, in regard to which dilemmas arise in practice, i.e. for which it is not completely clear whether they may be recognized as the expense of the branch office, and if so, in which portion.

For example, it is questionable whether the branch office should calculate and apply amortization in regard to fixed asset that is delivered by the foreign legal person – mother company to the Republic of Serbia for the purposes of conducting business operations there. Having in mind that in this specific case the fixed assets is used in the Republic of Serbia, for the purposes of conducting business activities in the Republic of Serbia, such expense should be eligible to be recognized in the Republic of Serbia for the purposes of  determining of tax obligations of the branch office. In case that a fixed asset is used in the Republic of Serbia only during one part of the relevant tax period, than the amortization cost should be divided proportionately with the duration of period in which the fixed asset was used in the Republic of Serbia.

Another question that arises in this regard would be the following: may the mother company charge any kind of fee to its branch office for the delivered fixed asset (apart from the actual costs of delivery and bringing the fixed asset to the location), and what would be the tax treatment of such charged fee? If we consider the basic rule that a foreign legal person – mother company and its branch office in the Republic of Serbia are not separate subjects/entities, but represent parts of one legal person, then the concept of fee (price) for the services of mother company to its branch office is in contradiction to the very nature of this relation. In connection with this, if the fee (price) is still charged by the mother company to the branch office, the question is whether such expense of the branch office could, and whether it should, be recognized for the purposes of determining of tax obligation in the Republic of Serbia. In case that a fixed asset is owned by the mother company, there is no visible ground for recognition of such expense in the Republic of Serbia, but if the mother company leased a fixed asset, or executed leasing (in terms of hire leasing) or bought a fixed asset for the purposes of business operations of its branch office in the Republic of Serbia, further invoicing of such amounts to the branch office seems legit and logical, and should be eligible to be recognized as expense of the branch office for the purposes of determining tax in the Republic of Serbia.

Using the same principle, what is to be done with activities carried out by the mother company in connection with business operations in the Republic of Serbia? Is it justifiable to recognize in this case certain expense calculated to the branch office by its mother company on behalf of such activities for the purposes of determining the tax obligation in the Republic of Serbia, and if so, how to determine the amount of recognizable expense? For example, the branch office does not need to have its own informational system, but it may (moreover, this is usually the case) use the informational system organized on the level of the entire company. In described case, e.g. cost of maintenance of informational system represents common expense of mother company and its branch offices (and potentially other forms of presence of the company in various countries) and it would be justifiable to recognize a portion of this expense in favor of the branch office when determining the tax obligation in the Republic of Serbia. It should be also taken into account thereof that this kind of expenses (in the specific example expenses of system maintenance) may occur as amounts paid to a third party for its provided service, but may also occur internally – the mother company itself maintains its systems, but such maintenance assumes certain use of materials, energy, employees, etc.

However, in this case, same as in many other cases of common expenses that cannot be distributed precisely between the mother company and its branch office, the question is how to determine the portion of expense that should be recognized in favor of the branch office, i.e. how to resolve the issue of adequate documentation for such expenses in the Republic of Serbia.

These questions may arise in practice as rather significant, having in mind that they create dilemmas in business running and calculation of business-related costs, whereby the commercial subjects are doing business in the atmosphere of permanent insecurity in terms of wondering whether they have properly evaluated and documented their expenses, and whether the same would be rejected in case of tax control.

Additional issue that emerged, and that arouse due to several opinions of the Ministry of Finance, regards the question whether the branch office is obliged to pay tax on reverse charge mechanism in situations when it pays to its mother company certain amounts that may be subsumed under one of the grounds prescribed by Art. 40 of the Law on Corporate Income Tax. The stand taken by the Ministry of Finance is that the branch office is obliged to calculate and pay tax under reverse charge mechanism in such cases, which is in contradiction to the explicit legal provision quoted by the Ministry itself, which provision regards the matter of income accrued by a non-resident legal person from a resident legal person. Namely, our case lacks one of the basic premises for application of Art. 40 – in particular relations between the mother company and its branch office, a resident legal person does not exist, but only the non-resident legal person and its permanent business unit. This stand of the Ministry of Finance is even more confusing if one takes into the account the fact that the Law on Corporate Income Tax makes explicit differentiation of relations between resident and non-resident legal persons (regulated by Art. 40 of this law), on one hand, from the relations between non-resident legal persons and their permanent business units in the Republic of Serbia (Art. 20 of the same law), on the other hand.

By Nikola Djordjevic, Partner, and Marija Vukcevic, Senior Associate, JPM Jankovic Popovic Mitic

The latest amendments to the Companies Act (“Act“) from 2021 specify the mandatory elements of the headquarters of each enterprise. Each registered office address must contain information related to the city, municipality, street or square, house number, floor, and apartment number.

This way, enterprises are obliged to harmonize the address of the headquarters with the Act. The deadline for the harmonization above is November 27, 2022. As businesses must register their headquarters address with the Serbian Business Registers Agency (“Agency“), they should synchronize this data in the appropriate register to include any missing data. The deadline for the Agency to decide on the registration application is five working days from the date of receipt, so one should start preparing all the necessary documentation on time.

In the case of a registered business, it should file for a change of address data if, for example, information about the floor or the apartment number is missing from the registered address. On the other hand, if you are looking to register an entity, you must provide the Agency with information on all mandatory elements of the headquarters’ address at the time of the registration.

If some of the elements do not exist, no worries. In this case, you must register only the existing data. For example, if your company is based in a family house with no floors/apartments, one would register the city, municipality, street, or square and house number.

This obligation is for all companies, entrepreneurs, and branch/representative offices based in Serbia.

By Ognjen Colic, Partner, Gecic Law