Expansion of the IT sector in Serbia has lead to an increased engagement of local IT experts by foreign IT companies. In practice so far, four models of engagement of the local experts by the foreign IT companies have surfaced, each of them having its advantages and disadvantages.
At one end there is engagement of the freelancers, as less costly type of cooperation, however, not ensuring the full control over them, while on the other end is incorporation of a subsidiary, which ensures greater control, but at the same time, is much more expensive. The other two models are in between.
The basic type of cooperation is engagement of the freelancers. More favorable tax treatment, as well as the lower total costs, as compared to the other types of cooperation, are the main reasons why the foreign IT companies chose this type of cooperation. In order to legally provide his/her services to a foreign IT company as a freelancer, the freelancer shall register himself/herself as an entrepreneur. In the said case, the foreign IT company and the freelancer shall execute an agreement which shall govern their relationships. Therefore, the foreign IT company shall cover the costs of the agreed compensation, while the freelancer shall be obliged to pay the taxes and contributions in compliance with the regulations. The basis for payment of the taxes and contributions may be either the difference between the freelancer’s revenue and incurred costs (allowed by the regulations to be deducted) or the revenue specified as the lump sum. Usually, taxes and contributions that are to be paid on the revenue specified as the lump sum mean lower amounts of the obligations towards the government. Since the foreign IT company, besides the agreed compensation has no other costs in connection with this type of engagement, cooperation with the freelancers represents the most favorable type of cooperation. Nevertheless, considering the uncertainty in terms of the duration of the period of such engagement, the freelancers rarely decide on the exclusive type of cooperation with the foreign IT companies. Even when they commit themselves, it is very difficult for the foreign IT company to control to what extent a natural person observes such commitment. So, if it is important for the foreign IT company to ensure that the freelancer is engaged only on its projects, the requested exclusivity is more likely to be achieved through one of the other types of cooperation. Additionally, there are cases in practice when the freelancers fail to register themselves as required, and accordingly do not satisfy their obligations specified by the law. Although in such cases the foreign IT company shall not be held liable for the freelancer’s illegal conduct, there is a risk of ruining the foreign IT company’s reputation by relating the foreign IT company with such conduct.
Should the foreign IT company and the Serbian IT experts wish to upgrade their cooperation they can do it by incorporating a company by the foreign IT experts. Following incorporation, this company and the foreign IT company shall execute an agreement which shall govern providing of that company’s services to the foreign IT company. As in case of the freelancers, the only cost for the foreign IT company shall be the amount of the agreed upon consideration. On the other hand, the incorporated company shall be obliged to pay the corporate income tax, while the IT experts who are the founders shall pay the tax on the dividend paid to them by the company. Besides the possibility for the IT experts to be engaged as the founders, there is also a possibility of employing the IT experts, in which case the terms of their engagement by the competitors shall be specified by the employment agreement. As the said type of cooperation, usually includes stronger connections between the local company and the foreign IT company, there is also the possibility of a larger influence of the foreign IT company on the local company’s operations. Nevertheless, the lack of the ownership and management control leaves such possibility only on the level of the agreement. In practice, this means that the foreign IT company cannot initiate proceedings against the company’s employee, should he/she violate the specified restrictions.
One of the ways in which the foreign IT company can exercise control over the Serbian IT experts is by establishing a branch office, which is the organizational unit of a foreign legal entity in Serbia. In this specific case, the foreign IT company, i.e. its branch office, shall execute an employment agreement with the local IT experts. This model of engagement of the local IT experts represents a more complicated procedure for the foreign IT company. First of all, contrary to the first two models of engagement, the cooperation with the IT experts cannot be simply terminated, considering the existence of the employment agreement and the procedure specified in the Labor Law, which procedure shall be observed should the employer, i.e. the foreign IT company, find the performance of the IT experts unsatisfactory. In addition to the aggravated procedure for termination of the cooperation, in this specific case, the costs to be incurred by the foreign IT company are much higher. In this case, for the first time, there is a new taxpayer, the branch office of the foreign IT company, which shall pay the corporate income tax as the Serbian resident, and is also obliged to pay the withholding tax and the contributions for the employees of the branch office, which calls for the additional costs of engagement of an accountant. Nevertheless, one of the prime advantages is presence of the management on the local level, which ensures the direct control over the IT experts performance, inclusive of the non-competition clause with the effective control of the observance thereof, with the possibility of the branch office to initiate the appropriate procedures for the purpose of protection of its business interests.
The most complex model of engagement against the IT activities in Serbia is incorporation of a subsidiary. The main difference between incorporation of the subsidiary and the branch office is that, subject to the Serbian laws, the branch office represents an organizational part of the foreign IT company, while the subsidiary is a separate legal entity. Another significant difference is that in addition to the corporate income tax, to be paid by the subsidiary, the foreign IT company shall also pay the tax on the dividend it acquires from the subsidiary. As in the case of the branch office, the subsidiary shall also engage the IT experts under the employment agreement, and accordingly, the same rights and obligations shall be in effect, as well as the advantages and disadvantages, as in the previous model of cooperation.
The decision to be made by the foreign IT companies in terms of the model they wish to apply will depend on the characteristics thereof, the extent to which the engaged Serbian IT experts are important for their business operations, as well as on the costs required for their engagement and the expected and achieved revenue from their engagement.
By Nikola Djordjevic, Partner, and Jelena Aleksic, Junior Lawyer, JPM Jankovic Popovic Mitic