The Regulation on Criteria for Granting Incentives to Employers Employing Newly Registered Residents in the Republic of Serbia has been the center of attention for many employers in Serbia over the past couple of months.
This Regulation entered into force on 18 June 2022, and it defines the conditions for obtaining new tax benefits from the Government.
What is it about?
The Government adopted the Regulation encouraging and facilitating the employment of newly registered persons for whom there is a demand on the domestic labor market. This is why the Regulation is important for all employers who plan to employ newly registered residents in Serbia, whether they are foreigners or Serbian citizens returning from abroad.
What are the incentives?
In particular, employers who meet the requirements of the Regulation can exercise the right to an incentive in the form of a reduction in salary taxes and mandatory pension and disability insurance contributions. The employer is to pay full taxes and the state will make a return payment to the employer who has submitted the application and meets the requirements. The payment amounts to:
- 70% of the calculated and paid salary tax for one or more newly registered residents
- 100% of the calculated and paid contributions for mandatory pension and disability insurance.
The employer has the right to subsidies for a maximum of 60 months, in the period from 1 July 2022 to 31 December 2028.
Who are newly registered residents in the sense of this Regulation?
First, a newly registered resident must be an employee for whom the need in the domestic labor market cannot be easily met.
Second, the condition is that this person has not stayed in the territory of Serbia for more than 180 days over a period of 2 years, counting from the day when the employer concludes the employment contract with that person.
Third, the employer and employee must exclusively conclude a full-time employment contract for an indefinite period of time.
And finally, the Regulation prescribes a condition concerning the basic salary of a newly registered resident - it must amount to a minimum of 300,000.00 dinars on a monthly basis.
Which employers are entitled to the incentive?
An employer in the sense of this Regulation can be any person who does business in Serbia:
- Domestic or foreign natural or legal person
- An entrepreneur registered to carry out activities in Serbia
- A subsidiary of a domestic or foreign company
- A branch of a foreign company
Attention: In which case is the employer not entitled to the incentive?
First of all, the employer must meet the condition regarding the number of employees who are employed on an indefinite and full-time basis. This number must be equal to (or greater than) the number of employees on the date of entry into the force of this Regulation, increased by the number of employed newly registered residents, i.e. on 18 June 2022.
Therefore, the employer does not have the right to incentives if, in the meantime, the number of full-time employees employed for an indefinite period of time has decreased.
In addition, the employer does not have the right to incentives in the following cases:
- If a fixed-term employment contract is concluded with a newly registered resident;
- If a part-time employment contract is concluded with a newly registered resident;
- If the employer pays dividends or realized profits, in the period from the submission of the first application for the allocation of incentives to the end of the calendar year in which the employer has received the last payment (except for dividends or profits that are paid from the portion of the profit that is higher than the amount received on behalf of incentives);
- If, for the same newly registered resident, currently uses or used to use other benefits to reduce the tax base and salary contributions by 70%;
- If the employer is a beneficiary of state aid, on the basis of which has the obligation to hire new workers (unless this obligation had been fulfilled by 1 July 2022).
Additional restrictions on the granting of this incentive:
- The right to this incentive is realized only for newly registered residents who are employed prior to 31 December 2023;
- For applications submitted as of 2024, the employer can exercise the right to incentives if in the period from 31 December 2023 and to the end of the year in which the incentives were last paid to him, the total number of full-time employees for an indefinite period has not decreased.
- The maximum number of employees for the incentive granting is calculated in relation to the number of employees on the date of entry into force of this Regulation, e.i 18 June 2022. The right to the incentive can be exercised for the number of employed newly registered residents by which the total number of full-time employees for an indefinite period has increased in relation to the mentioned date.
In what situations can an employer who has the right to the incentive lose that right? And what are the consequences?
- If the employer pays a dividend, i.e. a realized profit contrary to this Regulation, the employer is to return those funds;
- If the employer uses the right to reduce the base for newly registered residents in accordance with the Law on Personal Income Tax and the Law on Contributions for Mandatory Social Security, the employer is to return the received funds;
- If in the period after 31 December 2023, the employer reduces the number of full-time permanent employees, the employer loses the right to incentives and cannot submit an application for incentives again. If the employer obtained the right to incentives based on an application for incentives that was filed in the year in which the employer reduced the number of full-time permanent employees, the employer is to refund the full amount of incentives received based on that application.
In the event that the employer loses the right to incentives, and is obliged to return the total amount of funds received, the employer must do so within 5 days from the day of the loss of the right to incentives, which is decided by the competent Ministry.
What does the application and incentive payment procedure look like?
Here is an outline of the application process, as well as of the important deadlines:
1. The employer submits an application to the Ministry of Economy for each newly registered resident individually.
2. The application is submitted once a year (up to 8 times in total), in the period from 15 September to 30 September.
3. The application is submitted for the salaries of newly registered residents paid in the period from 1 July 2022 until 31 December 2028, whereby each application is submitted for salaries paid in the period preceding the submission of the application, for a maximum of 12 months.
4. The Ministry of Economy decides on submitted applications within 120 days from the deadline for submitting the application.
5. The employer has the right to file a complaint to the decision of the Ministry within 8 days of receiving the decision. The Ministry is obliged to decide on the complaint within 15 days.
6. The Ministry of Economy compiles and submits list of employers who have the right to the incentive, within 120 days of the deadline for submitting the application.
7. The Ministry of Economy transfers the funds to the Ministry of Finance - Treasury Administration, to a dedicated account, which then forwards those funds to the employer's dedicated account no later than 45 days. The Treasury Administration informs the Ministry of Economy on the payment realization.
What are the effects of the Regulation?
The new Regulation follows the globalist trend that is gaining momentum in the Serbian labor market as well, given the increasing number of newly registered residents who are employed in Serbia. Therefore, it is not difficult to conclude that this Regulation will ease the burden on employers of hiring highly qualified professionals, who possess the necessary knowledge and skills that are beneficial for the Serbian market, which is why this is good news for both employers and foreign workers. In addition, the consequences of this Regulation could be favorable for the demographic picture of Serbia, because the Regulation affirms the employment of domestic returnees who come - for example, from the diaspora, or who have completed their education or professional training abroad and returned to Serbia.
The application submission procedure is quite complex, subject to strict deadlines and voluminous paperwork, however, the tax benefits resulting from this procedure are also worthwhile.
The very first applications for this incentive start on 15 September and last until 30 September.
If you need additional clarification and legal advice, professional help in submitting an orderly and complete application, or if you want to ensure that you are covered when it comes to potential irregularities during the entire procedure, feel free to contact us.
Miloš Vučković, Senior and Managing Partner
Nađa Vuksanović, Junior Associate
*The information in this document does not represent legal advice and is provided for general informational purposes only.
**Partner, Senior Associate, Associate and/or Junior Associate refers to Independent Attorney at Law in cooperation with IVVK Lawyers.