Representative office of a foreign legal entity
REPRESENTATIVE OFFICE OF A FOREIGN LEGAL ENTITY – Serbia
– OBLIGATIONS TO A MANAGER –
According to the provisions of the law regulating companies, a representative office of a foreign legal entity is not a legal entity. According to the provisions of the law regulating corporate profit tax, it is not a permanent establishment (it does not perform an activity, only preparatory activities and the activities that precede contract conclusion) and it does not keep business records in accordance to the accounting regulations.
When a foreign company registers its representative office within the territory of the Republic of Serbia and appoints a non-resident natural person, who does not have temporary or permanent residence permit in the Republic of Serbia and will not stay there for 183 or more days during one calendar year, as a legal representative (manager), the legal representative (head of the representative office) does not receive remuneration for their work in the Republic of Serbia. Instead, that person is employed by the foreign parent company located in the headquarters country.
In practice, we are often asked if a representative office of a foreign legal entity is obliged to calculate and pay tax and associated contributions under the contract concluded to head of the representative office on mutual rights, obligations and responsibilities.
An important element of the contract concluded between the representative office and the head of that representative office on mutual rights, obligations and responsibilities is the amount of remuneration that shall be included. The proximate cause is the fact that the representative office of a foreign legal entity as the payer of contributions shall calculate and pay withholding tax and associated contributions at the moment of the pay-out of remuneration pay-out under the contract on mutual rights, obligations and responsibilities of the manager.
Why does this obligation exist?
First, under the Labour Law, a person performing the duties of a manager has the right to receive remuneration as well as other rights. Second, the opinion of the Ministry of Labour, Employment, Veteran and Social Affairs that the manager performing duties under the contract that does not imply employment is entitled to remuneration and that the remuneration is considered to be a mandatory part of the contract on mutual rights, obligations and responsibilities of a manager, who has not been employed by a company, in a situation when a natural person (in this case, a person who is not a founder or member of the company) performs the duties of a manager under the contract on rights and obligations of a manager without being employed by that company, there is the obligation to calculate and pay individual income tax on the second income as well as accompanying contributions for the mandatory social insurance based on the contracted remuneration (an important part of the contract on mutual rights, obligations and responsibilities of a manager).
As the amount of the manager’s remuneration is an important part of the contract on mutual rights, obligations and responsibilities of a manager and as such should be listed in that contract, the remuneration (which includes tax and contributions debited to the person receiving that remuneration) is contracted as an equivalent – appropriate remuneration for manager’s work, tax and contributions base. This is prescribed regardless of whether the natural person (manager) gives up the contracted remuneration in favour of some other person.
Under Article 8(1) of the Individual Income Tax Law, a natural person, who is not a resident (hereinafter: non-resident), shall pay individual income tax on the income gained within the territory of the Republic of Serbia. The income gained within the territory of the Republic of Serbia implies the income gained by a natural person based on their work on the territory of the Republic of Serbia (paragraph 2 of the Law). Under the Article 85(1)(5) of the Law, other income implies other income, which represents the income of a natural person, especially the earnings of the legal entity management members.
When it comes to the mandatory social insurance contributions, under the Article 28 of the Law on Mandatory Social Insurance Contributions, based on the contract on rights and obligations of a manager who has not concluded an employment contract, the contributions base is a taxable income gained as a contracted remuneration in accordance with the law regulating individual income tax. Under provisions of Article 57(1), the payer shall calculate, retain and pay contributions for persons receiving contracted remuneration at the moment of contracted remuneration pay-out.
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