Overview & Key Implications of the Recent Changes in the Commercial Law of the Republic of Serbia

From May of this year through the end of August, the government of the Republic of Serbia has enacted a number of changes to the commercial legal framework of the country.  The changes enacted provide a fairly good signal from the current government about their priorities in the coming years and their views on the challenges at present to the Serbian economy.  These legislative changes were also necessary for the government to continue the privatisation process.  On 15 September 2014 the state accepted letters of intent for 502 state owned businesses which are due to be either privatised or put into bankruptcy. 
 
These changes were enacted in four key areas of the commercial law: bankruptcy/insolvency, privatisation, labour, and tax.  We have provided a summary of the key changes to each area of the law and have outlined the important implications of the changes from the perspective of the government and the effect on investment climate in Serbia. 
 
Insolvency
 
The new law on insolvency that entered into force in August 2014 corrects deficiencies which were identified in the previous law. 
 
One key change to the insolvency law is the introduction of a new class of creditor which has claims that have arisen two years prior to the commencement of insolvency proceedings.  Further, now any pledges provided by the insolvency debtor within a year prior to the commencement of insolvency proceedings will have no legal bearing on the insolvency proceedings.  The government has also created obligations around the reporting of guarantees on property and the notification of guarantors in the case of an insolvency filing. 
 
The government has also tightened up the regulations regarding the responsibilities of insolvency managers and any material liability for damages incurred.  Finally, another important change is the definition between pledgees and secured creditors – pledgees have a pledge over property but do not have a claim against the insolvency debtor. 
 
In summary, there were material changes made to the law on insolvency that allow for clarity amongst the class of creditors, and which create greater transparency and accountability amongst the creditors, the insolvency debtors and the insolvency managers.  This is an important step to start the process of allowing insolvent entities to wrap up their activities and allow legitimate creditors to collect what is owed.  Further, steps were taken in order to increase accountability amongst the insolvency managers throughout the process.  This is a clear signal on the part of the government that insolvent entities need to resolved quickly and efficiently and we expect to see a number of state owned entities put through this process by the end of the year. 
 
Privatisation
 
The new privatisation law, which came into force in August 2014, prescribes for the privatisation process to be completed before 31 December 2015.  Four models of privatisation have been identified from the sale of capital, to asset sale to the transfer of capital and strategic partnership. 
 
The new law also allows the State to initiate insolvency proceedings where there is no investor interest and allows for pre-agreed insolvency plan over the subjects of privatisation. 
 
Finally, the new law extends the deadline to initiate enforcement proceedings against a company in restructuring and also established a deadline for the Privatization Agency to decide on payment of claims by 26 December 2014. 
 
These changes are an important signal of the government’s intention to manage its budgetary issues and put an end to the subsidisation of poorly run state owned enterprises.  This is an important step in reducing the size of GDP that is in the hands of the government, and making way for investors to participate in the country’s economic recovery. 
 
Labour
 
The new labor law, which came into force in July 2014, made significant changes.  Key changes were enacted simplifying the labor code and providing clarity to employers and investors that need to contemplate redundancies in order to weather the difficult economic conditions. 
 
Term employment was defined at a maximum of 24 months and an employee’s term of service is now limited to the actual time spent with the firm.  There were also a number of changes taking a more reasonable view on severance calculations and new disciplinary measures were introduced.  They have also limited the awards for unlawful dismissal, shortened the deadline for filing court claims for employment issues, and increased the fines for misdemeanors. 
 
Fundamentally, the changes in the law are solid step forward to allow troubled businesses to implement redundancies in order to restructure and also give employers increased transparency and certainty when managing their work force.  There is clearly still work to be done, that said, 65% of the Foreign Investors Council’s White Book recommendations on the labour law have been implemented with these changes.  Clearly, some of these measures will be unpopular with the electorate and as such, this is a solid first step which signals to investors that Serbia is willing to take the pain necessary to get the economy moving in the right direction. 
 
Tax
 
In May 2014 the Law on Personal Income Tax and the Law on Mandatory Social Security Contributions were amended with the aim to provide new tax and contributions reliefs for newly employed persons.  According to amendments, employers will have the right for a refund of 65% to 75% of taxes and contributions paid on salaries of newly employed persons, depending on the number of new employees.
 
Also, starting from August 2014, the new social security contributions rates are effective.  The rate for pension and disability contributions was increased to 26% and the rate for health insurance contributions was decreased to 10.2%.  However, the overall rate has not been changed.
 
In addition, one of the key changes is that tax misdemeanors are now prescribed only under this law and thus all tax misdemeanor provisions from laws on separate types of tax were eliminated, which provides increased clarity and transparency for business owners and investors. 
 
These tax changes will help stimulate new employment and provide increased transparency for employers and investors. 
 
In summary, the legislative changes to the privatisation law represent a good attempt to move the government budget into more sustainable territory which in turn will provide increased macro stability – from which everyone benefits.  Further, key changes to the laws on insolvency, labour and tax allow for greater transparency and increased certainty on the side of investors, helping to improve the overall investment climate. 
 
As mentioned, there is still plenty of work to be done, but we see these changes as a good first step and positive signal to investors interested in participating in growth opportunities of one of the largest economies headed down the EU ascension path. 
 
David Schoch is a founder and Managing Partner of EQUS Capital, a United States based operationally focused private equity group in the Western Balkans. 
 
Mr. Schoch currently serves as a member of the board of directors of Orion Telekom; a telecommunications investment holding vehicle set up and funded by an investment consortium led by the European Bank for Reconstruction and Development to facilitate the consolidation of the alternative telecommunication sector, and capitalise on telecommunications liberalisation in the western Balkans.  Mr. Schoch is also a founding shareholder. 
 
In addition, Mr. Schoch is a founding board member of the Serbian Private Equity Association and has been the president since January 2012. 
 
Mr. Schoch received a Bachelor of Science with distinction from the California State University in Sonoma and a Master of Business Administration with honors from the University of Chicago Booth School of Business.
 
Mr. Schoch speaks native English, intermediate Czech/Slovak and advanced Serbian/Croatian.
Mr. Schoch – a US citizen – was born in Frankfurt Germany, and lives in Belgrade with his wife and two children. 
 
Patricia Gannon is a senior partner of the Firm with a focus on the management, business development, strategy and expansion.  Patricia qualified as a solicitor in Ireland and the UK and after a short period working at the European Commission in Brussels and at the German law firm Haarman & Hemmelrath, she moved to Serbia in 1993 and established the Firm in 1995.
 
Patricia is a member of the International Bar Association and is a council member of the European Forum, which has a membership of more than 8,000 lawyers from all over Europe.  She is a former board member of the American Chamber of Commerce and legal advisor to the Foreign Investors Council, a leading network of foreign investors in Serbia.  In 2010 she founded the Serbian Philanthropic Forum, an umbrella forum of leading foundations in the Country.  In 2011 she founded the Serbian Private Equity Association and sits on the Board of Directors of that group.