In certain specialised industries that are focused on international or specific foreign markets, companies often choose to appoint a foreign national to the position of director.
Some of the most common questions that arise when making this decision include: Can I freely decide whether the director will be a domestic or foreign national? What are the advantages and disadvantages of this choice? In general, Serbian legislation does not distinguish between domestic and foreign nationals when it comes to the eligibility requirements for appointment as a director. However, appointing a foreign national to the position of director entails fulfilling of additional and specific legal obligations.
Engagement of a Director Who Is a Foreign National
The Employment Act prescribes the possible forms of engaging a director, while the scope of their authority, rights, and duties is regulated by the Companies Act.
According to the provisions of the Employment Act, a company may, regardless of whether the director is a domestic or foreign national, either establish an employment relationship with the director or engage them outside of an employment relationship. For each of these forms of engagement, a specific type of contract shall be concluded with the director. A director enters into an employment relationship with the company on the basis of an employment contract. On the other hand, a director shall be engaged outside an employment relationship under a contract that governs the mutual rights, obligations, and responsibilities of a director who is not employed by the company and the employer (the so-called management contract).
The most significant feature of a management contract is that the contracting parties are free to regulate their relationship without any strict conditions or limitations. In other words, a management contract allows the contracting parties to agree on the manner, location, timing, and pace of the director’s work, as well as to freely determine the remuneration for such work.
On the other hand, if the director and the company enter into an employment contract, the director will have the same rights and obligations as any other employee. Such a contract must contain the mandatory provisions prescribed by the Employment Act.
It is important to emphasise that a director—regardless of whether the director is a domestic or foreign national—may also be the founder of the company at the same time.
Temporary Residence and Work Permit for a Director Who Is a Foreign National in Serbia
According to the provisions of the Law on the Employment of Foreign Nationals, a foreign national whose stay in the Republic does not exceed 90 days within a 180-day period from the date of first entry—or longer, in accordance with the permitted duration of stay under an international agreement—has the right to work in the Republic of Serbia during that period without being issued a single permit for temporary residence and work in the Republic of Serbia, specifically if the foreigner is an owner, founder, legal representative, or member of a legal entity registered in the Republic of Serbia and is not employed by that legal entity.
In accordance with the above provisions of the Law on the Employment of Foreign Nationals, the obligation to obtain a single permit for temporary residence and work in the Republic of Serbia applies to:
- A director who has established an employment relationship with the company and has signed an employment contract with the company; and
- A director engaged under a management contract but who resides in the Republic of Serbia for more than 90 days within a 180-day period from the date of first entry, or for a longer period than prescribed by an applicable international agreement.
For more details on the procedure for obtaining a single permit for temporary residence and work in the Republic of Serbia, you can read the article published on my blog: Procedure for Issuing a Single Permit for Temporary Residence and Work of a Foreign National in the Republic of Serbia.
It is also important to note that the single permit for temporary residence and work in the Republic of Serbia applies specifically to the type of work for which the permit was requested, and even more precisely, to employment with the particular employer named in the application.
If a foreign national who has been granted a single permit for temporary residence and work in the Republic of Serbia wishes to be engaged by another company, or by the same company but in a different position, it is necessary to obtain a new single permit for temporary residence and work in the Republic of Serbia.
Remuneration for a Director Outside of Employment Relationship
Given that the conclusion of a management contract does not establish an employment relationship, the director does not receive a salary for their work. However, an engaged director who has not established an employment relationship with the company is entitled to appropriate remuneration for their work, and this right cannot be waived.
Although such remuneration does not constitute a salary, the payment of remuneration to a director who is not employed by the company entails:
- An obligation to pay personal income tax,
- An obligation to pay contributions for pension and disability insurance, and
- An obligation to pay contributions for health insurance, unless the individual is already insured on another basis.
The tax and mandatory social security contribution base for a director engaged under a management contract includes not only the remuneration paid directly but also all allowances, expenses, and financial benefits the director receives. On the other hand, if the director is engaged under an employment contract, the base for calculating taxes and contributions is the salary paid or earned.
Is a Director Who Is a Foreign National a Tax Resident of the Republic of Serbia?
According to the provisions of the Personal Income Tax Law, a taxpayer is considered a tax resident of the Republic of Serbia with respect to income earned both within the territory of Serbia and abroad.
A resident of the Republic, within the meaning of the Personal Income Tax Law, is a natural person who:
- Has a permanent residence or a centre of business and life interests in the territory of the Republic of Serbia; or
- Resides in the territory of the Republic of Serbia, continuously or intermittently, for 183 days or more within a 12-month period that begins or ends in the relevant tax year.
When it comes to foreign nationals, it is important to take into account that, although certain individuals may not be considered residents under the rules governing movement and residence within the territory of the Republic of Serbia, for the purposes of determining resident status in relation to tax obligations, the relevant legislation is the Personal Income Tax Law.
It is also important to note that tax residents are liable to pay personal income tax both on income earned in the Republic of Serbia and on income earned abroad. However, in cases where a double taxation avoidance agreement exists between the Republic of Serbia and another relevant country, one of the two states will always have priority over the other with respect to the right to taxation.
Tax Obligations of a Non-Resident
According to the provisions of the Personal Income Tax Law, any individual who earns income within the territory of the Republic of Serbia is liable to pay annual personal income tax, which is levied on the income of natural persons, specifically:
- Residents – on income earned both within the territory of the Republic of Serbia and in another country, and
- Non-residents – on income earned within the territory of the Republic of Serbia.
In any case, regardless of whether the director is a tax resident or not, the income of the director, who is a foreign national and whose income, in accordance with the rules of the Personal Income Tax Law, is subject to taxation in the Republic of Serbia, shall be included in the total annual income that may be subject to annual personal income tax, if the total amount of such income exceeds the legal limit.
Read more:
Legal aspects of the contract of the company members »
Forms of work engagement in Serbia »
Labour inspection – jurisdiction and inspection »
