The managing director’s role in modern business structures undoubtedly goes far beyond the boundaries of formally managing a company. A director’s executive role is only a fraction of this significant figure of your business – this is the person who assumes responsibility for business management, strategic decision-making, and the achievement of business goals. In other words, the company’s operations depend on the activities of the director.
The number of managing directors within a company depends on the structure and scope of a company’s business. A company may appoint one or more directors – for each part of the company’s business. Companies with more complex business structures usually appoint more directors to distribute responsibilities within the company. The director represents the company towards third parties in accordance with the founding act, decisions, and instructions of the competent bodies. If a company has more than one director, all directors represent the company jointly, unless otherwise determined by the founding act or a decision of the company’s general assembly. A company could provide that each director acts independently in managing the company’s affairs through the company’s founding act, that means that the director may not independently undertake actions if the other managing directors object. Thus, the Law enables a kind of mechanism for limiting the freedom to manage company affairs.
In addition to responsibility for managing the company’s affairs, the Law provides that the director is responsible for business books, financial statements and keeping records of decisions of the general assembly, as well as for the obligation to inform all shareholders of the company about its operations and to enable them to inspect the company’s documents.
The director is liable to the company for damage caused by violating the provisions of the Companies Act of the Republic of Serbia, the articles of association or the decision of the general assembly. The Law excludes the director’s liability if the director acts in accordance with a decision of the general assembly. [1] Among other things, a Contract on the rights and obligations of the managing director can be viewed as a tool for clearly defining the boundaries of authority, liability to the company, but also the protection of one of the most important figures in every company’s transaction. It should be borne in mind that all of these limitations are internal in nature, i.e. they operate only in the relationship between the director and the company, whereas from the perspective of third parties the director is authorized to conclude transactions in the name and on behalf of the company.
Is it mandatory for a director to conclude an Employment Agreement?
No, a managing director is not required to conclude an employment agreement. Contrary, a director may perform their function in other ways, without establishing a typical employment relationship with a company:
- A person may be appointed as director by a decision of the company and, on that basis, perform the function of director. This may be any person the company chooses, including the founder of the company who may be appointed as director. However, it is always recommended to draw up an agreement that will regulate in detail the relationship between the director and the company, to avoid potential disputes;
- The director may perform their function based on Contracts on the rights and obligations of the managing director.
Contract on the rights and obligations of the managing director is mostly concluded when a managing director and the founder of the company are not the same natural person and when the director is not entering into an employment relationship with the company. In practice, a Contract on the rights and obligations of the managing director is known as a Management agreement.
The managing director of a company is the key figure for strategic decision-making within a company, and a Contract on the rights and obligations of the managing director is a flexible way to further regulate the scope of the director’s rights and obligations.
This is why understanding the legal nature of this agreement is crucial both for directors and for company owners – which we discuss further below.
Legal nature of the contract on the rights and obligations of the managing director
Under the provisions of the Labour Law of the Republic of Serbia [2], it is possible to establish an employment relationship by concluding an employment contract with the director as an employee, who in that case enjoys all statutory employment rights. In that case, the managing director receives salary.
On the other hand, the Labour Law recognizes a Contract on the rights and obligations of the managing director as another basis for engaging a director. If a director is not considered an employee, this agreement regulates the mutual rights, obligations, and responsibilities of a director. A regular employment relationship cannot be established trough this agreement.
A person who performs the duties of director based on a management agreement is entitled to remuneration for work and other rights, obligations and responsibilities in accordance with the agreement. However, that remuneration does not constitute salary, nor does the relationship established by this agreement constitute an employment relationship.
Remuneration under a management agreement is recognized in the Companies Act, which prescribes that the total compensation for a director, or the method of determining such compensation, is determined by the relevant internal documents of the company. Even the Serbian Ministry of Finance has recommended that a Director’s Rights and Obligations Agreement should provide appropriate compensation as a form of remuneration for the director’s work for the company.
The Serbian Labour Law, does not prescribe each individual element of a Contract on the rights and obligations of the managing director, as it does in the case of an employment contract, where it explicitly lists the mandatory elements. However, this opens the door for both the director and the company to harmonize the content of the agreement in line with the needs of their specific business.
A management agreement may be efficient until the expiry of the term for which the director has been appointed, or until the director is dismissed by a decision of the company.
5 key differences between an employment agreement and a contract on the rights and obligations of the managing director
To understand the legal nature of a management agreement, it is important to distinguish an employment agreement with the director from concluding a Contract on the rights and obligations of the managing director.
1. Employment status – Unlike the employment contract, a director engaged based on a Contract on the rights and obligations of the managing director does not establish an employment relationship and is therefore not considered an employee within the meaning of the Labour Law.
2. Nature of remuneration – In terms of remuneration, a director under an employment contract receives compensation that has the character of salary and must comply with rules on minimum wage, whereas under a Contract on the rights and obligations of the managing director the director is entitled to appropriate remuneration, but it does not have the character of salary.
3. Taxation – Unlike the system of taxation applicable to salaries under an employment contract, remuneration under a Contract on the rights and obligations of the managing director is subject to tax on “other income”. Since the tax-law aspect is extremely important for a company’s operations, it is addressed in more detail in one of the following sections.
4. Employment-related rights – A director engaged based on a Contract on the rights and obligations of the managing director is entitled only to the rights provided for in that Agreement, without establishing an employment relationship. This is the key difference when we talk about this type of agreement. By contrast, a director engaged under an employment contract enjoys all rights guaranteed by the Labour Law.
5. Foreign nationals in the role of director – Given that there are currently many companies on the Serbian market whose legal representatives are foreign nationals, it is necessary to emphasize that a foreign director is required to obtain a single permit for residence only if he or she stays in the Republic of Serbia for more than 90 days within a 180-day period. Here we see a significant difference compared to a director engaged under an employment agreement, where the director would be required to obtain a residence permit regardless of the number of days spent in Serbia. Engaging a foreign person as director is therefore recommended based on a Contract on the rights and obligations of the managing director, particularly if the director plans flexible engagements and short-term stays in Serbia. [3]
Criterion | Employment agreement with the managing director | Director’s Rights and Obligations Agreement |
1. Employment status | The director establishes an employment relationship and is considered an employee within the meaning of the Labour Law. | The director does not establish an employment relationship and is not considered an employee under the Labour Law. |
2. Nature of remuneration | Remuneration is characterized as salary in accordance with labour regulations. | The director receives appropriate remuneration, which differs from salary. |
3. Taxation | Salary is subject to the system of salary taxation. | Remuneration is subject to tax on “other income”. |
4. Employment-related rights | The director enjoys all rights arising from employment (e.g. annual leave, sick leave, years of service, severance pay). | The director has only those rights that are provided for in the agreement, without establishing an employment relationship – which also affects pensionable service. |
5. Foreign managing directors | A foreign director must obtain a temporary residence permit in Serbia. | A foreign director must obtain a residence permit only in the event of staying for more than 90 days within a 180-day period. This form of engagement is suitable for flexible and short-term engagements. |
Purpose and content of a director’s rights and obligations agreement
Let us start with a common question: With whom does the director conclude a Contract on the rights and obligations of the managing director?
The director is appointed by the general assembly of the company, or by the supervisory board if the company has a two-tier structure. After the decision is passed, the director may enter into a Contract on the rights and obligations of the managing director. This agreement regulates the rights and duties of the director during the term of office, as well as in the event of early removal.
In practice, the content of the agreement depends on the size and organization of the company, as well as the arrangement between the founders and the director. However, a Contract on the rights and obligations of the managing director typically includes some basic elements, such as:
- precisely agreed and appropriate remuneration for the director’s work;
- the right to reimbursement of expenses (e.g. travel expenses, business trips in Serbia and abroad);
- the right to absence from work due to temporary incapacity;
- other agreed rights and responsibilities, etc.
Of all the basic elements of a Contract on the rights and obligations of the managing director, one question regularly arises: What constitutes appropriate remuneration for the director’s work?
This question often causes numerous dilemmas in practice, particularly from the tax-law perspective. That is why, in the continuation of the text, we explain some of the most common uncertainties.
While the director’s basic rights may appear similar to those under an employment contract, the flexibility of a Contract on the rights and obligations of the managing director makes it possible to regulate bonuses, incentives, and liabilities of the director more precisely.
Examples of agreed obligations and incentives for the director:
Director’s duties set out in the Companies Act and the company’s founding act |
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Forms of incentives for the director |
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Taxation of remuneration received under a contract on the rights and obligations of the managing director
Does engaging a director on the basis of a Contract on the rights and obligations of the managing director prevent the director from being insured under some other basis at the same time?
No.
Engaging a director based on a Contract on the rights and obligations of the managing director does not restrict that person from being employed in another company and therefore insured simultaneously on another basis.
Simultaneous existence of two different insurance bases
For example, a person may be a director based on such an agreement, while at the same time being employed by another employer.
Below is an overview of the difference regarding the obligation to pay social contributions for the director as a natural person:
Insurance basis | Obligation to pay contributions |
| Obligation to pay pension and disability insurance contributions and health insurance contributions at the rates prescribed by law.
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| Obligation to pay only pension and disability insurance contributions at the rates prescribed by law. |
Overview of contribution rates set out in the Law on Contributions for Mandatory Social Insurance[4]:
The type of contribution | Rate |
Mandatory pension and disability insurance (PIO) | 24,00% |
Mandatory health insurance | 10,30% |
Unemployment insurance | 0,75% |
At this point, we would also point out the consequences of the fact that the director signed a Contract on the rights and obligations of the managing director with the company. Accordingly, the company that pays the agreed remuneration to the director under this agreement is responsible for calculating, withholding, and paying the director’s contributions.
Tax treatment of remuneration under a Contract on the rights and obligations of the managing director (which does not have the character of salary)
Income received by the director as a natural person under a Contract on the rights and obligations of the managing director is characterized by the Personal Income Tax Act as “other income”.
The contribution base for persons receiving agreed remuneration is the taxable income from that remuneration in accordance with the Personal Income Tax Act.
Taxable income = gross income reduced by standardized costs in the amount of 20%
Personal income tax on “other income” is paid at a rate of 20%, in accordance with Article 86(1) of the Personal Income Tax Act.[5]
From all the above it follows that the choice of the basis for engaging a director also has important tax-law consequences, which must be carefully analysed when deciding on the form of agreement.
Advantages and risks of a director’s rights and obligations agreement
Contract on the rights and obligations of the managing director is becoming an increasingly common choice in the business world, mostly because of its dynamics. The high percentage of migration in modern times means that the number of foreign directors is increasing every day. It is this type of agreement that provides a certain level of flexibility when it comes to the position of a foreign person.
Flexibility compared to an employment contract also exists with respect to the agreed remuneration received by the director under a management agreement. Namely, the remuneration that the director receives under a Contract on the rights and obligations of the managing director does not constitute salary, so the amount of that remuneration is not limited by regulations on minimum wage. Thus, flexibility arises both in terms of the director’s autonomy in performing their duties and in determining the amount of remuneration for the director’s work.
ADVANTAGES | RISKS |
Greater flexibility in negotiating conditions and remuneration – an advantage from both the director’s and the company’s perspective. | Greater personal responsibility of the director in terms of tax obligations – noting that the director’s liability is separately regulated by the Companies Act. |
The possibility of clearly defining targets and bonuses – beneficial for both the director and the company. | |
Fewer formalities compared to establishing an employment relationship. | The taxation responsibility of the director, as a natural person – which at the same time is an advantage for the company. |
Agreeing remuneration without limitations imposed by minimum wage regulations. |
Conclussion
Contract on the rights and obligations of the managing director is not just a legal formality – it is a framework of trust between the owner of a company and the person entrusted with running the business. When clearly drafted, this agreement enables an optimal balance between flexibility and legal certainty, thereby reducing risks and increasing the efficiency of corporate governance.
For this reason, it is important that every Contract on the rights and obligations of the managing director is tailored to the specific business circumstances, with careful consideration of the tax and labour-law consequences of each clause within the agreement.
