Serbia: Options For Regulating The Relationship Between Non-Resident Managing Directors And A Limited Liability Company

Within Serbia, the relationship between a non-resident managing director and a company may be regulated by an employment or a management agreement. But a foreign company often wishes to dispatch its employees to perform management functions in its Serbian subsidiaries while continuing their employment with the dispatching company. In such a case, the employees are assigned to the resident company in Serbia under the Serbian Labour Act.

Employment agreement

One option for regulating the relationship between a nonresident managing director and a Serbian company is the employment agreement, which may be concluded for a definite or indefinite period.

For the employer, negative aspects of the employment agreement are: certain rights that must be provided to the employee, a termination procedure that must be complied with, the obligation to consult the employee in case of termination, labour costs, notice periods (one to three months depending on the years of service), and more.

Pursuant to Article 167 of the Companies Act ("Official Gazette of Republic of Serbia", no. 125/2004; Zakon o privrednim druatvima), the dismissal of a managing director does not affect his rights or obligations under the employment agreement. However, it can be agreed in the fixed term employment agreement that the employment relation will be terminated following a dismissal as managing director.

Management agreement

Managing Director

Under Article 48 of the Labour Act ("Official Gazette of Republic of Serbia", nos.24/2005, 61/2005 and 54/2009; Zakon o radu), the managing director need not to be in an employment relationship with the company. The relationship between a company and a managing director can be regulated by a management agreement, in which case the managing director is entitled to remuneration for work performed. Where such remuneration is agreed, it is considered a salary pursuant to the Labour Act, meaning it is subject to income tax (12%) and social security contributions. However, if the managing-director is a non-resident, Double Taxation Treaties (DTT) and Bilateral Social Contributions Agreements (BSCA), if applicable should be consulted as they may regulate tax and social contribution obligations differently.

Further, management agreements are more flexible with respect to termination, given that the relevant provisions of the Labour Act do not apply. Management agreement may be terminated upon the managing director's dismissal from the function, which is not the case under an open ended employment agreement.

Members of the Management Board

If the relationship between a company and the members of the management board is not regulated by an employment agreement, the company and the board members may regulate their relationship by a management agreement. This agreement differs from the management agreement with the director, provided under Article 48 of the Labour Act, as the remuneration agreed is not considered a salary.

Assignment of employees

Another option for regulating the relationship with a nonresident managing director is assignment of employees. Assignment of employees is a common practice in Serbia, given that many foreign companies assign their employees to manage and carry out other activities in their Serbian subsidiaries. However, it should be confirmed on a case-by-case basis whether this option is possible in the assigned employees' jurisdiction of residence.

Assignment of employees is a suitable option where the employer does not intend to terminate the employment agreements with the assigned employees, but merely plans to temporarily dispatch them to the Serbian company. In this case, the managing director would be assigned to perform the management function within a Serbian company. While assigned, the employees are still employed by the assigning (non-resident) company, which continues to pay their salaries, while the relationship between the Serbian employer and the assigning employer is regulated by a business cooperation agreement.

With respect to the income tax and social contribution obligations, the DTT and BSCA should be consulted, if applicable.

Management agreements are more flexible with respect to termination, given that the relevant provisions of the Labour Act do not apply. Management agreement may be terminated upon the managing director's dismissal from the function, which is not the case under an open-ended employment agreement.

This article was originally published in the schoenherr roadmap`12 - if you would like to receive a complimentary copy of this publication, please visit: pr.schoenherr.eu/roadmap.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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