Management Agreement in Serbia

12
May 2022

Contact: Kristina Vuljaj

Following the decision on establishing the company, it can be said that the decision on who will be the company’s managing director is the second most important decision when starting a business. Although each step in the company formation procedure requires absolute attention and planning, about which you can read more in the blog post Company formation in Serbia in 7 steps, the appointment of the director, as well as their authorization, is of strategic importance, besides having the formal one.

Management’s decisions determine the course of your business, hence despite the quality of the business idea or the situation in the market, such decisions are the key to business success or failure.

Therefore, every company should give close and thoughtful attention when deciding who will be the director.

Quite often companies are looking for someone who has “soft skills” in a certain field, especially when it comes to the specific industries, which are oriented towards the international or specific foreign market. In this situation, it is not unusual that the Serbian market does not offer an adequate candidate who will be willing to join a company as a managing director. Therefore, companies often decide to hire a foreign citizen as a managing director.

Therefore, some of the main questions are: Can I freely choose whether the managing director will be a domestic or foreign citizen? What are the pros and cons of the choice?

The answer to the first question is yes. Generally, Serbian law does not distinguish between domestic and foreign citizens in this regard. Before answering the second question, let’s see on which basis the managing director can be hired.

Management Agreement

The Serbian Employment Act defines the form under which the managing director can be engaged. On the other hand, the Companies Act governs the authorities, duties, and responsibilities of the managing director.

When it comes to the form of engagement, the Employment Act defines two types of contracts that can be concluded with the managing director. The first one is the engagement of the managing director outside of the employment, under the Agreement on Regulating the Rights and Duties of the Director. (so-called managing agreement), while the other one is a standard Employment contract, based on which the director enters into an employment relationship with the company.

The most important characteristic of the Management Agreement is that, in principle, two equal parties enter into the contractual relationship, regulating their relationship freely, without any strict conditions and limitations.

Hence the Management Agreement allows the parties to agree on the manner, place, time, and dynamics of the managing director’s engagement, as well as to freely determine the compensation for such work.

On the other hand, if the managing director and the company conclude the employment agreement, the managing director will have the rights and obligations as other employees and such agreement must contain mandatory provisions defined under the Employment Act.

Hiring a Managing Director Who is Foreign or Domestic Citizen?

Regardless of the fact whether the managing director is a domestic or foreign citizen, they can be hired in any of the two manners that we mentioned above.

However, it is important to note that hiring a foreign citizen as a managing director, might trigger some additional steps that must be taken. Specifically, it might be necessary to regulate their status in the Republic of Serbia, with respect to the temporary residence and work permit.

Managing Director’s Temporary Residence in Serbia:

If foreign citizens desire to stay in Serbia for over 90 days within 180 days, they must obtain a temporary residence permit. Additionally, a temporary residence permit is a prior condition for obtaining a work permit in Serbia.

As a representative of a company registered with the Serbian Business Register Agency, the managing director has the right to apply for a temporary residence in Serbia. You can find out more regarding the conditions and the purpose of the temporary residence permit in our blog post Getting a Temporary Residence in Serbia.

To clarify, the managing director has the right to apply for a temporary resident permit in Serbia, and afterward to obtain a work permit.  However, if the managing director enters into the employment relationship with the company or if he/she is hired under the management agreement but stays in Serbia for more than 90 days within 180 days, he/she must obtain a temporary residence permit and work permit.

How to Get a Temporary Residence in Serbia?

The specificity of the procedure for obtaining temporary residence on the basis of employment (including engagement outside the employment relationship) is that it is necessary to obtain a labor market test results prior to applying for the temporary residence permit.

The purpose of the labor market test is to determine whether there is anyone among the unemployed citizens of Serbia with the same qualification as the foreign person applying for the job. If the labor market test shows that there is such an unemployed domestic citizen, the employer will be advised to also consider the domestic person for the position.

You are probably now wondering how anyone could restrict you or limit you from choosing a person for such an important position such as the managing director…

Although experience and knowledge are the most important factors that you will consider before choosing a person for the position of managing director, the personal qualities of the director are equally important. However, the labor market test is a step that cannot be avoided even in this case.

Work Permit in Serbia:

After obtaining a temporary residence permit, it is necessary to obtain a work permit. Even though the work permit is issued for the managing director’s work, the company is the one who must file the request.

To obtain more information regarding the procedure for obtaining a work permit, please see our blog post on Obtaining a Work Permit in Serbia.

As explained above, if the managing director and the company conclude the employment agreement, it is necessary to obtain a work permit. On the other hand, the necessity to obtain a work permit for the managing director engaged under the management agreement depends on the actual time that they will spend in Serbia.

In general, the fact that the managing director is not in the employment relationship does not exclude the company from the obligation to obtain the work permit if the managing director works in Serbia. However, since the non-employed the managing director and the company can arrange managing director’s work conditions with respect to the place and time of work freely, it will not be necessary to obtain the work permit in some cases.

For example, the managing director can work form any country and come to Serbia only a few times, once a year or even less frequently. In this case, the work permit is not mandatory.

On the other hand, if the managing director wishes to spend more than 90 days in Serbia within 180 days, they must obtain the temporary residence permit as well as the work permit.

Purpose of a Work Permit in Serbia

It is important to note that a work permit allows a foreign citizen to engage in a specific work for which that permit is obtained. Furthermore, it applies only to the work performed with a specific company that applied for the work permit.

Accordingly, if a foreign citizen for whom the work permit was obtained desires to change the company, or to change the position within the same company, it will be necessary to obtain a new work permit.

This should not come as a surprise, bearing in mind that a labor market test must be obtained for every work engagement of a foreigner in Serbia.

Managing Director’s Compensation under the Management Agreement

Bearing in mind that the person engaged under the Managing Agreement does not enter into employment relations, such person is not to entitled to a salary. However, a managing director who is engaged on this basis has the right to fair compensation.

Even though that is not considered a salary, the managing director’s right to compensation also comes with the obligation to:

1) pay the citizen’s income tax;

2) pay the pension and disability; and

3) pay health insurance fees, if the managing director is not under the same insurance on another basis, such as employment.

Now when you know that you must pay tax and contributions for the managing director’s income, you are must be wondering what is the taxable amount for these obligations.

The taxable amount is the actual payment that you are paying to the managing director together, together with all financial benefits as well as costs that you are covering for the managing director, if the managing director is hired based on the management agreement.  On the other hand, if the director is hired based on the employment agreement the basis for payment of taxes and contribution is managing director’s salary.

Is a Managing Director a Tax Resident of the Republic of Serbia?

Persons obliged to pay the income tax are determined under the Personal Income Tax Act:

1) individuals with a residency in Serbia or natural persons who have their personal and business activities in Serbia; or

2) individuals persons who have spent at least 183 days in Serbia within one financial year.

It is important to note that although according to the rules of movement and residence in the territory of Serbia some persons are not considered residents, to determine whether an individual is a tax resident or not, the applicable regulation is the Personal Income Tax Act. Additionally, it is also important to note that tax obligation is calculated based on both income received in Serbia and abroad.

However, it is also crucial to consider whether Serbia and the respective country have concluded the double taxation treaty. If this kind of treaty exists, one of the counties will have the preferred right to income taxes.

What about Tax Obligations of Non-Tax Residents?

According to the Personal Income Tax Act, each individual that acquires income in the territory of Serbia is obliged to pay the income tax regardless of their tax or any other residence status.

Therefore, regardless of the fact whether a managing director is a tax resident or not, their incomes in Serbia are subject to income tax. Moreover, all income that is subject to taxation in Serbia is calculated as a annual citizen’s income, which can be subject to annual income tax if it exceeds the legal limit.

What is a Fair Compensation for the Managing Director

It is clear that there are numerous ways to engage a foreign managing director, especially when it comes to companies founded by a foreign entities or any company that have a need to engage a foreign managing director.

Due to these various possibilities, it is practically impossible to determine a single parameter, which would serve as a basis for calculating the fair compensation for the managing director’s work.

To support this claim, the best example would be managing directors who run the company from abroad and only occasionally visit the company’s seat in Serbia. What would be the fair compensation for them?

Therefore, it should not come as a surprise that often managing directors hired under the Management Agreement have symbolic compensation. Such a system works well for many companies due to the fact that the managing director is usually engaged in an associated legal entity where they earn a profit.

Founder and Managing Director in the same time?

Another important question is whether the same person can be a managing director and the founder of the company. The answer is yes. Moreover, it is not uncommon that the same person is the founder and managing director of the company.

Very often, the companies’ founders decide to be the managing directors of the company, in order to be sure that the business will be started in the desired way. After establishing the grounds of the business, founders might seek for another person who will be hired as a managing director.

Knowing all of this, appointing a managing director is very important in various aspects, including tax, statutory position and strategy.

However, what is certain is that you have the choice and the ability to tailor your way and responsibility to run your company according to your needs. All in all, knowing that there is a choice and possibility to adjust this important position and engagement as it is most suitable for you, should be used as your advantage.

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