Obligation to pay pension and disability insurance (serbian: PIO) contributions for directors
In business, one of the very frequent questions is the question of the tax obligations of the director or legal representative, how it is stated in the Business Registers Agency. All the director’s tax obligations stem from how his employment-legal status in the company is regulated.
The possibilities are as follows:
- The director may have a labour agreement
- The director can also be one of the founders of the company, without entering into a labour agreement
- The director of the company based on the contract on the rights and obligations of the director without an employment relationship
The director may be employed. By concluding an Employment Contract, the director acquires the same rights and obligations as other employees. Among other things, the director has rights to salary, for which the company pays taxes and contributions, which are calculated according to the same principles as for other employees.
The director can also be one of the founders of the company, without entering into a labour agreement. In that case, the company is obliged to pay mandatory social insurance contributions for him. Contributions are calculated on the minimum contribution basis. The amount of the minimum contribution base changes every year, for the year 2023 it is 35,025 dinars.
The director of the company based on the contract on the rights and obligations of the director without an employment relationship. In this case, the director does not enter into a labour agreement, nor is he one of the founders of the company. A third person, not a company owner, is elected to the position of director. Hereat, a contract on the rights and obligations of the director is concluded with this person.
One of the mandatory elements of this contract is the director’s remuneration. Remuneration is taxed with personal income tax at a rate of 20% and contributions for mandatory social insurance. If the director is employed elsewhere, only the PIO contribution will be paid for him, at the rate of 24%.
What we often have as an issue in practice is the case when the contract stipulates the director’s free work, that is, when a Contract of unencumbered director is concluded. As taxes and contributions are calculated based on the income, and there is no income, in this case, the opinion of the ownership and management structure of the company is that there is no obligation to calculate and pay taxes and contributions for the directors. There are also cases where directors without an employment relationship waive their right to compensation under the contract on the rights and obligations of the director.
However, the government uses several mechanisms to stop this, both for domestic and foreign citizens. For this purpose, the opinion of the Ministry of Labour and the opinion of the Ministry of Finance were adopted, in which the following arguments are stated:
– foreign citizens who perform the function of director of a company in Serbia based on the contract on the rights and obligations of the director (without entering into a labour agreement) receive contractual compensation as well as other rights, obligations and responsibilities in accordance with that contract.
– the Constitution of the Republic of Serbia stipulates that everyone has the right to fair compensation for work and that no one can waive that right
– the amount of compensation is a mandatory element of the contract
– if the director agrees with the employer to waive the agreed fee, the employer is, regardless of that, obliged to pay the contribution for pension and disability insurance on the lowest required basis.
The course of doing a business in Serbia speaks of insufficiently developed tax awareness, which is why we often encounter the denial of such and similar tax obligations until the moment of tax audits or the closure of the company.
If for some reason a tax audit occurs, it can also be extended to the verification of the payment of the obligation based on director’s remuneration. Therefore, the Tax Administration during the control can, using the principle of factuality, call into question why any person would perform work and perform the function of director without remuneration. Suspecting that it is a so-called simulated business, the Tax Administration can insist on payment of obligations to the government even though the director has not been paid for his work. More precisely, the Tax Administration is not obliged to comply with the opinions of the Ministry of Finance (which in this matter coincide) because it has its own mechanism through the principle of factuality by which it carries out the tax coverage of this tax form.
The last stop at which this problem becomes “visible” to the tax authorities is when the company is liquidated. At the end of the liquidation procedure, the Tax Administration issues a decision that the company has paid all tax obligations. This decision is a prerequisite for deleting the company from the Business Registers Agency. Before issuing such a decision, the Tax Administration checks how and whether you have completed your obligations towards the government, among other things is whether you have paid taxes and contributions for the director.
According to the opinion of the Ministry of Labour, foreign citizens who in the Republic of Serbia perform the function of director of a company based on the contract on the rights and obligations of the director, are considered insured self-employed persons. The opinion states:
“Foreign citizens, employed in their domicile countries, who in the Republic of Serbia perform the function of director of a company on the basis of a contract on the rights and obligations of the director and on that basis do not receive the agreed remuneration, cannot be exempted from the application of the legal regulations of the Republic of Serbia which regulate pension and disability insurance, and acquire the status of insured self-employed persons, and the employer is obliged to calculate and pay contributions for pension and disability insurance in accordance with the regulations on contributions for mandatory social insurance, on the basis of taxable income. The fact that foreign citizens do not have a regulated residence in the Republic of Serbia does not affect the determination of the status of insured self-employed persons. (Ministry of Labour, Employment, Veteran and Social Policy, 011-00-00383/2021-07 dated December 8, 2021)”
From all of the above stated, it is certain that tax obligations based on hiring a director without an employment relationship are mandatory. For any doubts on this topic, our team is at your disposal.
