Category: Uncategorized

The legal framework for functioning of the banking sector in the Republic of Serbia has recently gone through a change by the adoption of the Law on Amendments and Supplements to the Law on Banks (Official Gazette of RS, no. 14/2015) which entered into the force on 12 February 2015 and is applicable as of 1 April 2015 (hereinafter referred to as: the Law).

The main reason for the adoption of the Law lies in the need for improving the mechanism of resolving the problem of insolvent banks to which problem the previous legal framework and in particular the Law on the Assumption of Assets and Liabilities of Banks for the Purposes of Safeguarding Stability of the Financial System of the Republic of Serbia(‘’Official Gazette of RS’’, No 102/2012) only partially gave a positive response.

We would to use this opportunity to highlight the fact that the Law specifically regulates the question of bank restructuring (new Chapter of the Law, No 5, or Articles from 128a to 128h). Also, this extensive legislative text implements EU directives in the legal system of Republic of Serbia, particularly Directive 2014/59/EC (Directive 2014/59/EU on establishing a framework for the recovery and resolution of credit institutions and investment firms). 

Together with the adoption of the amendments and supplements to the Law on Banks, amendments and supplements to the Law on the National Bank of Serbia, Law on Deposit Insurance, Law on Bankruptcy and Liquidation of Banks and Insurance Companies, Law on Deposit Insurance Agency as well as to the Law on Ministries were also adopted all with the same goal to implement new institutes introduced by the Law. 

SIGNIFICANT NOVELTIES

From significant novelties introduces by the Law, for this occasion we highlight only few as follows:

1. New institutes introduced by the Law

The Law introduces following institutes to the legal framework of banking sector in Serbia:

1.1 Undercapitalized bank

Instead of previous institutes of significantly and critically undercapitalized banks, the Law redefines undercapitalized bank as the bank whose capital adequacy ratio is lower than prescribed, or whose capital is lower than required, as well as the bank whose capital adequacy ratio is lower than the one prescribed by the National Bank of Serbia (hereinafter referred to as: NBS). 

1.2 Bank important for the system

The Law introduces institute of the Bank important for the system to the banking sector and defines it as the bank whose deterioration in the financial condition or termination of operation would have serious negative consequences on the stability of the financial system. Banks that are important for the system shall be designated by NBS on the basis of the criteria and methodology it prescribes which shall especially take into account the size of the bank, its links with other participants in the financial system and its substitutability in this system, as well as the complexity of its operations.

1.3 Critical functions and Key business activities

The Law defines critical functions as activities, services or operations whose interruption would probably lead to endangering of the stability of the financial system or to disturbances in the provision of essential services to the real economy due to the size, market share and the relationship between the entity that performs them with the other participants in the financial system, especially taking into account the possibility of someone else taking over the performance of these activities, services or operations. Key business activities are commercial activities and services associated with these activities whereby substantial portion of revenue of the bank or banking group to which the bank belongs is achieved.

2. Restructuring of the Bank

The Law introduces additional authorizations as well as additional measures and instruments to NBS as the body responsible for restructuring, as a special kind of administrative procedure in which will be possible intervention of NBS by measures prescribed by the Law over a bank that meets the legally prescribed conditions for restructuring, all in order to keep the critical functions and the key business activities of the bank, at the same time with limitation of the restructuring costs and negative impacts on economic and financial system.

Instead of revocation of bank’s operation license in the case of business difficulties, the Law predicts that in the case of restructuring of the bank with business difficulties, that otherwise would be reasons for revocation of bank’s operation license, bank’s operation license will not be revoked by force of the Law, if there is public interest to implement restructuring. 

The Law predicts following restructuring instruments:

2.1 Sale of shares and/or part or whole assets and liabilities of the bank; NBS may sell the shares of the bank in restructuring or all assets or liabilities of that bank, or part thereof, to the acquirer who is not a bank for a specific purpose.

2.2 Transfer of shares of one or more banks in the restructuring process or transfer of part or whole, assets or/and liabilities of one or more banks in restructuring process to the bank for specific purposes;

2.3 Separation of property or transfer of the assets and liabilities of the bank in restructuring or the bank for specific purposes to the Deposit Insurance Agency or other legal entity (so called: asset management company); NBS may transfer the assets and liabilities of the bank in restructuring or the bank for specific purposes to the Agency or other legal person that is not a bank for specific purpose, if conditions predicted by the Law are fulfilled. Aim of this instrument is to allow transfer of so called ‘’bad assets’’ of the bank in restructuring or the bank for the specific purpose. 

2.4 Distribution of losses to shareholders and creditors; We highlight the obligation of NBS to prepare a plan of restructuring for each of the banks active on the territory of the Republic of Serbia. In the opinion of the nominator of the Law, planning the process of bank restructuring is crucial for successful and efficiently bank restructuring because it is a condition which allows individual approach to the bank restructuring, which is way is necessary to consider systematic importance of the bank when drafting plan of bank restructuring as well as plan of bank recovery, to identify critic functions of the bank and ensure their continuity. That is way plans of restructuring have to consider precise information about bank, including dates about organization structure, business lines, financing source, planed instruments and measures of restructuring which shall be applied on the bank, about critical functions of the bank and ways of providing continuity of its performing, and have to consist analysis about critical interdependence and influences of appliance of restructuring instruments on the other financial institutions and financial market, as well as dates about way of communication and exchange of information between NBS and the bank.

Additionally, we highlight that the Law introduces that in the case of administrative dispute regarding procedure of restructuring, the Administrative Court cannot resolve in the proceedings of full jurisdiction. The Law predicts that the Court cannot resolve the administrative issue for which the present Law stipulates competence of NBS.

Also, by lawsuit against the decision to revoke the bank’s operation license, the decision whereby write-off and conversion of capital is implemented, and the decision adopted by NBS in the procedure of restructuring, the banks may only seek the determination of illegality and the annulment of that decision, as well as compensation for damages if that was not claimed in a separate proceedings. Third parties shall retain the rights and obligations acquired on the basis of the annulled decision, while the plaintiff’s rights shall be limited to the compensation of damages he suffered by the execution of that decision.

3. Recovery plan as the instrument of preventive activities 

The Law introduces the obligation for the Bank to prepare recovery plan which envisages measures that the bank shall apply in the case of a significant deterioration in its financial condition, to re-establish its sustainable business and the corresponding financial position.

Within the recovery plan, the bank shall determine different possibilities for recovery and measures that would be implemented within each of these options. The recovery plan shall be evaluated by NBS. The Bank shall update the recovery plan at least once a year, and at the request of NBS more often. NBS shall, within six months from the date of delivery of the recovery plan, evaluate whether the plan meets the requirements predicted by the Law. 

4. New control measures of NBS – Measures of Early Intervention

The Law introduces extended and control functions of NBS over banks and prescribes new corrective and coercive measures in the bank control process (Section 3, Chapter 5 of the Law). 

Beside corrective and coercive measures (sending a written warning, imposing orders and measures to eliminate the determined irregularities, revoke of bank operating license), predicts, among other, new measures of early intervention.

The measures of early intervention may be taken by NBS, independently of prescribed corrective measures, over the bank that acted in contravention of regulations, or it is likely that, among other things (due to the fact that its financial situation is rapidly worsening, including the deterioration in liquidity, increase of the level of indebtedness, non-performing loans or concentration of exposure), the bank shall soon to act contrary to the relevant regulations. The measures of early intervention, among other, include carry out one or more measures of the recovery plan, measures of status corporative nature as to convene an assembly of the shareholders, as well as other measures that NBS find adequate. 

Additionally, beside the measures of early intervention, NBS may issue a decision to order the dismissal of members of the management body of the bank, or the dismissal of other persons in management position in the bank, or issue a decision on the appointment of temporary administration of the bank. 

5. Change of competences of corporative bodies of the bank

The Law introduces the change of competences of corporative bodies of the bank including the General Meeting of Shareholders, the Board of Directors and the Executive Board as well as the change of conditions for the appointment and dismissal of the members of these boards. 

Additionally, the Law now introduces possibility for representative of NBS to attend the meetings of the Board of Directors, the Executive Board of the bank, as well as meeting of the Audit Board, Credit Board and Board for managing assets and liabilities. 

6. Special obligations of banks introduced by the Law

Banks are obligated to harmonize their internal acts with the provisions of the Law, by no later than 01 July 2015.

Recovery plans as closely defined and described in the text above, banks are obliged to submit to NBS by no later than 30 September 2015.

The deadline for NBS to draft plans of restructuring as closely defined and described in the text above, is one year after the Law entered into force, for the banks holding operation license or two years after the Law entered into force for the banking group. 

By Milos Curovic, Partner, and Aleksa Andelkovic, Senior Associate, ODI Law Firm

Significant changes to the tax regulations in the Republic of Srpska (“RS”) are expected in the coming months. On March 6, the National Assembly of RS passed amendments to the Law on Fiscal Cash Registries. In addition, Parliament approved the Government’s proposals on amendments to several important tax laws, including corporate income tax, personal income tax, social security contributions and property tax. Proposed changes to the laws governing accounting and financial audits have also been approved. These changes are intended to clarify and strengthen existing tax rules, widen the tax base and introduce more discipline in the payment of tax, but also to reduce the tax burden for businesses in order to stimulate economic growth.

Proposed Amendments to the Law on Fiscal Cash Registers

Changes to the Law on Fiscal Registries which came into force on 27 March 2015, provide that in the event that a taxpayer breaches his/her obligations regarding fiscal registries, the Tax Administration has the authority to prohibit the taxpayer from engaging in business activity for a minimum period of 15 days, or until the taxpayer remedies the irregularities uncovered by the Tax Administration. However, the Tax Administration is only allowed to impose performance prohibitions through administrative procedures and not through misdemeanor procedures as was previously the case.

Proposed Amendments to the Corporate Income Tax Law

The most important changes proposed in the area of corporate income tax include an increase in the withholding tax rate from 10% to 20%. It has also been proposed that a withholding tax on dividends be introduced.

The capital gains or losses arising from the sale of fixed assets or investment property (such as shares and other types of securities, gold, stamps, etc.) used for the business activities of a taxpayer are no longer included in the calculation of taxable profit according to the proposed law.

Under the proposed law, interest and expenses arising out of a loan are deductible for tax purposes only in the fiscal year when such interest and expenses accrued. Also, according to the proposed law, in the event that a parent company does not deduct interest and expense payments in respect of a loan, its subsidiaries may deduct such interest and expenses in an amount that is proportional to the amount of the used loan. It is also proposed that expenses incurred for the purpose of marketing and advertising are recognized for tax purposes up to 5% of total taxpayer’s revenue.

Transfer pricing rules will be strengthened and clarified by the proposed changes which adopt transfer pricing methods and definitions of related parties established under OECD Transfer Pricing Guidelines and prescribe that all related party transactions must be in line with the “arm’s length” principle. The threshold for related-party status is increased from the previous 10% to 25% participation in capital, management and voting rights.

Under the proposed law, all taxpayers are required to prepare a transfer pricing study and submit the study to the Tax Administration upon request. In addition, taxpayers whose transactions with related parties exceed the threshold prescribed by the Ministry are required to submit the “annual declaration of controlled transactions” which presumably includes some sort of list and description of transactions with related parties.

Detailed instructions on the transfer pricing methods, form and content of the transfer pricing study and annual declaration of controlled transactions are to be prescribed by the Ministry of Finance.

If adopted, the proposed law will enter into force on 1 January 2016.

Proposed Amendments to the Law on Personal Income Tax

The most important change in the area of personal income tax is the abolishment of tax on dividend income.

Another important change is the proposal to introduce an obligation on foreign nationals investing in RS to pay tax on income generated outside RS (i.e. “world-wide” income). Proposed amendments introduce new type of taxpayers “non-domiciled residents”. A non-domiciled resident is a foreign national who has invested more than BAM 20 million (app. EUR 10.3 million) in RS, and who fulfils one of the following criteria: (i) he/she has spent more than 30 days in RS; (ii) he/she owns a residential property in the RS with a value of at least BAM 300,000 (app. EUR 150,000); or (iii) he/she has a share capital in a company registered in the RS of at least BAM 100,000 (app. EUR 50,000). The proposed amendments do not provide any explanation as to what qualifies as an “investment in the RS” for the purpose of applying the new rules.

Under the proposed amendments, foreign nationals who fulfil the criteria listed above will be required to pay tax not only on income that is generated in the RS, but also on income earned abroad. Tax will be paid in defined fixed amounts, depending on the amount of income generated abroad: from BAM 100,000 (EUR 50,000) for income up to BAM 2 million (app. EUR 1 million), to BAM 1.6 million (app. EUR 800,000) for income exceeding BAM 40 million (app. EUR 20 million).

The possibility of paying tax on foreign income in pre-defined fixed amounts is also provided to residents of the RS, if they invest at least BAM 20 million (app. EUR 10 million) in the RS, instead at the standard 10% tax rate applicable to the total amount of taxable income.

These proposed new rules requiring foreign nationals who are not residents of RS to pay tax in the RS on their foreign income are very unusual, and deviate from the residency principle (a fundamental principle of income tax) whereby only residents (or in some countries nationals) of a given state are required to pay tax on their world-wide income in that state. Non-residents are normally required to pay tax in a given state only if such income is generated from sources in that state. If this unusual system of taxation is ultimately adopted, it will be interesting to see how the tax authorities of the RS will proceed with implementation, given that they will have limited ability to force foreign nationals to actually declare foreign income in the RS.

Another important change is a significant expansion of the types of income subject to personal income tax. A relatively short list of taxable income under the Personal Income Tax Law currently in force would be expanded by introducing a residual category called “other income”. Under the proposed amendments “other income” includes fees to members of management bodies (management, supervisory and other boards), income generated in show business, income of athletes, translators, independent journalists, service income, and even scholarships to students and athletes. All these types of income should be taxed at the standard 10% personal income tax rate.

The proposed amendments also try to capture undeclared personal income, again in a somewhat unusual manner which is not likely to be efficient in practice. In this respect, the proposed amendments prescribe that natural persons in the RS are required to pay tax on the difference between their declared income and the value of their assets. There are no rules to clarify what are to be considered as “assets” or “declared income” for purposes of the application of this new rule, nor why would taxpayers choose to declare this “income”, if they had chosen not to declare its source in the first place.

The imposition of tax on the difference between the value of a taxpayer’s major assets and his/her declared (and taxed) income is a standard anti-avoidance measure present in the tax laws of many countries. It is likely that the intention behind this provision is to provide tax authorities with some mechanism for pursuing the taxation of undeclared income of citizens of the RS. However, for these new provisions to work in practice, the proposed language of the provisions will have to be significantly improved.  

Proposed Amendments to the Law on Contributions

If adopted, the proposed amendments to the Law on Contributions will lead to an overall reduction of social security contributions from the current 33% to 31.6%. The proposal is to reduce rate of social security contributions for health insurance from the current 12% to 11%. The rate of social security contributions for insurance from unemployment would be reduced from the current 1% to 0.7% and for child protection from 1.5% to 1.4%. Contributions for pension and disability insurance would remain the same at 18.5%. 

Proposed New Real Estate Tax Law

The proposed Real Estate Tax Law will introduce fixed rates of tax on immoveable property: 0.20% for property which is used for commercial production, and 0.25% for all other real property. The tax will be levied on the market value of the real estate in question. Currently, the rates of real estate tax in the RS depend on the location of the property and range from 0.05% – 0.50 %.

The proposed law prohibits a taxpayer from selling real property if it did not settle in total its real estate tax liability. The public notary in RS will be obliged to check whether the taxpayer fulfilled all its real estate tax obligations before allowing the execution of the agreement on sale of real property or any other notarial instrument for purpose of transfer of real property from taxpayer to a third party.

Proposed New Law on Payment of the Tax Debts

The proposed new Law on Payment of Tax Debts has been introduced in response to a ruling by the Constitutional Court of RS declaring certain provisions governing the settlement of tax debts to be unconstitutional.  These provisions allowed corporate debtors to settle their outstanding tax liabilities by converting their tax debts into equity, and writing-off interest for the late payment of tax after paying the entire amount of the principal tax debt.

The proposed amendments allow debtors to postpone the payment of their tax debts only once. The postponement may be allowed for a period of up to one year, or payment in 60 monthly instalments.  In addition, the postponement may be allowed only if certain conditions have been fulfilled, the most important being that the outstanding tax debt is secured (by a mortgage, pledge or other type of security). The postponement is not allowed for real estate tax.

Proposed New Law on Accounting and Audits

The proposed new Law on Accounting and Audits eliminates the requirement of companies in the RS to prepare semi-annual financial statements.  Corresponding amendments to the Law on Financial Statements will also be required to bring this amendment into effect.

In addition to the categories of small, medium and large companies, the proposed amendments introduce the new category of micro entities. A micro entity is a company which has less than five employees, assets of less than BAM 250.000 (app. EUR 127,000) and annual profits of less than BAM 500.000 (app. EUR 255,000). Companies falling into this new category will not be required to submit annual financial statements. Proposed amendments introduce mandatory audit of financial statements for large- and medium-sized companies. 

The public will have a chance to discuss and comment on the proposed changes to the tax laws of the RS in a public discussion that will be held in the following two months.  After the public discussion, the Government and the competent Ministries of RS will prepare their final proposals which will be presented to the Parliament for a final vote within the next six months.

Karanovi? & Nikoli? Law Firm will organize a business luncheon in relation to the proposed amendments to the tax laws in Republic of Srpska which will be held in Banja Luka on 28 April 2015.

Written by Tanja Unguran, Partner, and Branimir Rajsic, Senior Consultant, Karanovic & Nikolic