It is well understood that new and better technologies are the key driver of progress (or hindrance if not employed responsibly – but that is a topic for a different article).
Presently, many of the most important technological developments relate to information technologies. Worldwide IT products and services are constantly growing in value and importance. This is also true for Serbia, where the IT sector stands out as arguably the most promising and fastest-growing industry.
Both as projects originated and developed in Serbia, and as an outsourcing of processes by foreign companies, IT services and other innovative technologies are an important driver of economic growth and a source of employment, especially for young and educated individuals.
Despite their importance, local IT companies face numerous challenges, including access to finance and regulatory constraints (especially when cross-border transactions are involved).
Serbian authorities have taken certain steps aimed at addressing some of the pressing issues and thereby facilitating further growth of the IT industry. There are attempts to mitigate the issue of access to capital (caused principally by lack of VC investors, underdevelopment of local capital markets and absence of crowdfunding platforms), as well as to provide support and infrastructure for start-ups.
Specifically, different types of grants for companies in IT and innovative activities are provided by the Fund for Innovative Activity (Fond za inovacionu delatnost) and by local governments, typically as funds for financing projects in different phases of development. The existing legal framework also enabled establishment of technology parks, hubs, incubators and other organizations which provide support and infrastructure to innovative companies (typically in the early stages of their development).
Nonetheless, most start-ups are still self-financed, meaning that there is still plenty of room for improvement in that department. Hopefully, the new Law on Innovative Activity (draft of the new law was published recently – you can find it here) can bring about positive changes. The draft law introduces the category of “aimed support programs” which the Government is to define for each year in advance and ultimately provide financing for. In addition, a “Strategy for Development of a Start-up Ecosystem” is also in the process of preparation, with the emphasis on education, infrastructure and enabling access to financing.
While it is clear that the Government recognizes the importance of providing an adequate framework and support to this growing and dynamic industry, the exact impact of the new measures (if adopted) is yet to be seen.
Tax legislation also provides certain tax benefits for innovative and IT companies. Notably, investors in innovative companies are entitled to a tax credit of 30% of the investments made in form of capital increase, under the conditions specified by the law. In addition, income derived from IP rights can be deducted for tax purposes (IP box), while the expenditures for development of innovations can be recognized in a double amount.
Such tax incentives might not be useful for start-ups which provide services for foreign companies (a typical case in practice) or rely primarily on foreign investors. A more tangible help for such companies might come in form of tax deductions for new employees, as for many start-ups their talented and highly-qualified employees are their biggest asset, but at the same time their (gross) salaries are their biggest expenditure.
The most convenient option for companies to take advantage of tax breaks would be to hire persons holding the status of a “qualified newly-employed person” as defined by the tax legislation which came into force in January 2020 (with the purpose of incentivizing companies to formally employ their “consultants” and “service providers”). This status entails a significant reduction of salary income tax and social contributions until 31 December 2022 (60% of tax and 85% of the contributions in 2022), and it is expected that the benefits will be extended beyond 2022. Although the deadlines for obtaining this privileged status have expired, those individuals who already have it are entitled to retain it even if they change employers.
Moreover, newly founded companies engaged in innovative technologies are exempt from tax and social contributions for salaries paid to their founders/shareholders up to certain amount. One or more shareholders can take advantage of this benefit (Serbian citizens and foreigners alike), as long as they own at least 5% of the shares. Exemption is applicable for the period of 36 months after incorporation, under the condition that the company is founded until 31 December 2021 (new legislation might extend this deadline).
Although the aforementioned tax break is quite substantial, the limitation is that owners must be employed with the company, which disqualifies companies fully-owned by foreign or local legal entities. On the flip side, this might provide an incentive for the investors to grant an ownership share to managers and key personnel from the get-go.
Other existing employment incentives entail conditions which render them mostly inapplicable to start-ups due to prescribed conditions (e.g. that newly-employed persons were previously unemployed for at least 6 months), but it is expected that new types of benefits could be introduced, specifically with relation to research and development.
In light of the above brief overview, it can be concluded that the existing environment (legal and otherwise) for start-ups is not ideal, and that there is plenty of room for improvement. Serbian Government recognizes the importance of creating an adequate framework, infrastructure and support to start-ups and innovative companies in general, and certain steps are taken in that direction.In the meantime, entrepreneurs and investors looking to do business in Serbia should get acquainted with the existing framework, incentives, and benefits, in order to frame their business structure in an optimal way, while constantly being on the look-out for new measures, grants and other opportunities that might come along.
This text is for informational purposes only and is not legal advice. Feel free to contact us if you need additional information.
Damjan Despotović, partner