What you should know about entrepreneurs in Serbia

Entrepreneur – concept and characteristics, change of legal form of entrepreneur in LLC

1. The concept and characteristics of the legal form of the entrepreneur

“Entrepreneur is a legally capable natural person who performs activities for the purpose of generating income and who is registered as such in accordance with the Law on Registration.” – Article 83 of the Law on Companies (“Official Gazette of RS”, No. 36/2011, 99/2011, 83/2014 – other law, 5/2015, 44/2018, 95/2018, 91/2019 and 109/2021), “Law on Companies”. This legal form of performing economic activity is extremely simple both for the establishment and for functioning, which are also its greatest advantages.

• Establishment

The establishment procedure is reflected in the submission of mandatory documentation for the registration of entrepreneurs to the Serbian Business Registers Agency (“SBRA“):

1. joint registration application for the establishment of legal entities and other entities and entry in the single register of taxpayers;
2. proof of identity of the entrepreneur (for a domestic natural person – a photocopy of the ID card, and for a foreigner – a photocopy of the passport / foreign ID card, or a photocopy of the ID card, if issued to a foreigner);
3. proof of payment of the fee for registration of entrepreneurs;
4. permit, consent or other act of the competent authority, if it is prescribed by a special law as a condition for registration.

After checking the fulfillment of the conditions for registration, the SBRA issues a decision approving the application, assigning the registration number to the entrepreneur, and the Tax Administration assigns the TIN ex officio.

• Tax

There are two ways of taxing entrepreneurs. Most often, the entrepreneur is flat-rate taxed. This means that the tax administration, based on the submitted tax return, makes a decision which determines a fixed monthly amount of taxes and contributions for compulsory social insurance that the entrepreneur is obliged to pay.

An entrepreneur can be flat-rate taxed, but there are certain conditions for flat-rate taxation, defined in the Law on Personal Income Tax (“Official Gazette of RS”, no. 24/2001, 80/2002, 80/2002 – other law, 135 / 2004, 62/2006, 65/2006 – corr., 31/2009, 44/2009, 18/2010, 50/2011, 91/2011 – decision US, 7/2012 – harmonized dinars, 93/2012, 114/2012 – decision US, 8/2013 – harmonized dinars, 47/2013, 48/2013 – amended, 108/2013, 6/2014 – harmonized dinars, 57/2014, 68/2014 – other law, 5/2015 – harmonized dinars, 112/2015, 5/2016 – harmonized dinars, 7/2017 – harmonized dinars, 113/2017, 7/2018 – harmonized dinars, 95/2018, 4/2019 – adjusted dinars Amount, 86/2019, 5/2020 – adjusted dinars Amount, 153/2020, 156/2020 – adjusted dinars Amount, 6/2021 – adjusted dinars 44/2021, 118/2021, 132/2021 – harmonized dinars Amount and 10/2022 – harmonized dinars Amount, “Law on Personal Income Tax”), so that:

The right to flat-rate taxation cannot be granted to an entrepreneur:

1. who performs activities in the field of advertising and market research;
2. who performs activities in the field of: wholesale and retail trade, hotels and restaurants, financial intermediation and activities related to real estate;
3. in whose activity other persons also invest;
4. whose total turnover in the year preceding the year for which the tax is determined, or whose planned turnover is when the activity begins – more than 6,000,000 dinars;
5. who is registered as a taxpayer of value added tax in accordance with the law governing value added tax.

Exceptions to rule number 2:

• Exceptions are entrepreneurs who produce and sell exclusively their own products as part of their activities.
• An exception is an entrepreneur who performs trade or catering activities in a kiosk, trailer or similar prefabricated or mobile facility. At his request, these entrepreneurs can be allowed to pay taxes on a lump sum determined income.

An entrepreneur who does not meet the conditions for flat-rate taxation, i.e., an entrepreneur who decides that he does not want to pay taxes at a flat rate, pays the following taxes in the following way:

1. income tax (tax rate is 10% on the basis of the difference between income and expenses of entrepreneurs on an annual basis);
2. contributions for obligatory social insurance (contribution for PIO, contribution for obligatory health insurance and contribution for insurance in case of unemployment);
3. annual personal income tax (if the conditions determined by the Law on Personal Income Tax provided for in Articles 87-89a are met).

• Bookkeeping

After taxation, bookkeeping appears as a logical sequence in explaining the functioning of an entrepreneur. The essence is again in the difference between a flat rate entrepreneur and a non-flat rate entrepreneur.

In most cases, the flat-rate entrepreneur does not need to hire an accountant, because he can easily manage all the documentation himself. A flat-rate entrepreneur only needs an accountant in the case when he has employees, so it is necessary for the accountant to calculate salaries every month.

An entrepreneur who is a flat-rate must keep double-entry books. Entrepreneurs most often hire external bookkeeping agencies to keep books.

• Residence / Work Permit

A foreigner who registers an entrepreneur in the Republic of Serbia must obtain a temporary residence permit, and then a work permit, in order to be able to perform activities in accordance with the competent regulations in the Republic of Serbia.

• Cessation of activities

An entrepreneur can register a dormancy, which is professionally called a temporary cessation of activities. The cessation can last indefinitely, and during that time, the obligations of entrepreneurs regarding taxes and contributions are also dormant.

The entrepreneur has the right (and obligation) to register the cessation of activities. The entrepreneur is obliged to point out a notice on the period of cessation of performing the activity at the place where he performs the activity. During the period of cessation of activities, the entrepreneur cannot perform activities, nor can he conduct business activities – to provide services and deliver goods, but he is able to receive payments for previously provided services and delivered goods if his current account is active. The entrepreneur is not obliged to close the bank account during the period of cessation of activities, but he is obliged to inform all banks in which he has accounts about the change by submitting a decision of the SBRA stating the cessation of activities.

According to the Law on Contributions for Compulsory Social Insurance (“Official Gazette of RS”, No. 84/2004, 61/2005, 62/2006, 5/2009, 52/2011, 101/2011, 7/2012 – harmonized dinar amount, 8/2013 – harmonized dinar amount, ex., 47/2013, 108/2013, 6/2014 – harmonized dinar amount. ex., 57/2014, 68/2014 – other law, 5/2015 – harmonized din. ex., 112/2015, 5 / 2016 – harmonized dinar amount, 7/2017 – harmonized dinar amount, 113/2017, 7/2018 – harmonized dinar amount, 95/2018, 4/2019 – harmonized dinar amount, 86/2019, 5/2020 – harmonized dinar amount, 153/2020, 6/2021 – harmonized dinar amount, 44/2021, 118/2021 and 10/2022 – harmonized dinar amount), an entrepreneur who terminates the activity in accordance with the law, the obligations to pay contributions are suspended in the period in which he does not perform the activity. However, the entrepreneur can continue to pay contributions even in the period in which he does not perform the activity. If the entrepreneur decides to use the first option and does not pay contributions, the standstill period will not be recorded in the total length of years of service, and the entrepreneur will not have health insurance in this period.

During the cessation of activities, the entrepreneur’s tax obligations are also suspended, but in accordance with the Law on Personal Income Tax, an entrepreneur who ceases or terminates self-employment during the year is obliged to file a tax return for determining the tax for the period from the beginning of the tax period until the day of cessation, within 30 days from the day of cessation of activities.

The entrepreneur who keeps business books is obliged to state in this tax return the amount of calculated and paid tax in the tax period until the day of termination, i.e., cessation of independent activity, as well as to submit a tax balance with the tax return.

In case the entrepreneur owns a fiscal cash register, it is necessary to conduct defiscalization.

• Deletion / Liquidation

The deletion of the entrepreneur lasts as long as it takes to obtain the certificate of the Tax Administration and the Local Tax Administration that the entrepreneur has settled all obligations for taxes and contributions.

• Responsibility for obligations

For all the obligations he has in the business, the entrepreneur is responsible with all his assets, which includes the assets he acquired during the business activities. The fact that needs to be pointed out is that the responsibility of the entrepreneur for the obligations that arose during the performance of the activity does not seize end even after the deletion, i.e. his creditors can be settled from personal property even after deleting the entrepreneur.

• Independence test

Entrepreneur, in accordance with the Law on Personal Income Tax, is subject to the independence test, which means that in certain cases it can be taxed under different conditions than those previously explained.

2. Change of the legal form of an entrepreneur into the legal form of a limited liability company

“A limited liability company is a company in which one or more members of the company have shares in the share capital of the company, provided that the members of the company are not liable for the company’s obligations except in cases provided for in Article 18 and Article 548 of this Law.” – Article 139 Law on Companies. A limited liability company or abbreviated LLC is a legal form of performing economic activity in which the members, as a rule, are not liable with their own property for the obligations of the LLC, but the LLC is liable with its own property. There are exceptions to this rule prescribed by the Law on Companies, and members are liable with their own property for the obligations of the LLC in the event of a Piercing the Corporate Veil and after the implementation of the compulsory liquidation procedure.

The change of the legal form from an entrepreneur to a limited liability company is allowed, provided that this “transition” is not direct, but the entrepreneur is shut down and the activity in the form of a limited liability company continues.

• Reasons for changing the legal form

The most common reason for changing the legal form of entrepreneurs in LLCs is the growth and development of business, which is measured by the annual turnover of entrepreneurs in the amount of over 6 million dinars, which is, as already indicated at the beginning of the text, a lump sum limit. An entrepreneur who exceeds this limit can no longer be taxed at a flat rate, so the option of switching to an entrepreneur who keeps books or changing the legal form in the LLC remains.

Another reason for changing the legal form could be the case in which the entrepreneur intends to introduce a partner who wants to be a co-owner in the company. As an entrepreneur cannot have more than one owner, this is one of the moments when an entrepreneur should consider moving to a legal form of LLC in which the number of owners – members is not limited.

The third reason for changing the legal form of entrepreneurs in LLCs may be the need to transfer business responsibility from the personality of the entrepreneur to the company itself, i.e., LLC. The entrepreneur is responsible with all his property for business obligations, while the owner (member) of the LLC owns a company that is independently responsible for its obligations with its own property.

• What is the transition procedure?

Like all other changes related to the company, the fact of transferring the entrepreneur to the LLC is registered in the SBRA. It consists of deleting entrepreneurs and founding a limited liability company. Since the LLC is formally opened, it is necessary to prepare all the documentation as with any other LLC establishment.

To delete an entrepreneur and continue the activity in the form of a company, it is necessary to submit:

1. registration application for deletion of an entrepreneur;
2. proof of payment of the registration fee for LLC RSD 4,900.00;
3. proof of payment of the fee for registration and publication of the founding act RSD 1,000.00;
4. decision on the continuation of activities in the form of LLC;
5. joint registration application for the establishment of legal entities and other entities and entry in the single register of taxpayers;
6. documentation for the establishment of the LLC;
7. certificate from the competent organizational unit of the Tax Administration confirming that the entrepreneur has no outstanding tax liability on the day the certificate is issued;
8. certificate of the tax administration of the competent local self-government unit confirming that on the day of issuing the certificate the entrepreneur has no outstanding obligations based on local utility taxes and which is not older than five days at the time of requesting deletion from the register.

After obtaining TIN and registering a limited liability company, it is necessary to open a bank account, submit a tax return and apply for social and health insurance. If the company has a fiscal cash register, it is also necessary to defiscalize the cash register from the entrepreneur and fiscalize it again to the LLC. This completes the re-registration process and can continue with regular operations.

The LLC that was registered receives a new personal identification number and registration number and is practically a new company, but the decision states that it is the legal successor of the entrepreneur who was terminated due to re-registration.

The logical question is, what about contracts and other legal transactions concluded by an entrepreneur? The decision of the SBRA, which registers the establishment of the LLC, will clearly state that the LLC is the legal successor of the entrepreneur who was shut down, i.e., that the LLC continues the activity of an entrepreneur. This means that the LLC is practically the legal successor of the entrepreneur and can build on all existing legal affairs.

• Differences in business

When there is a change in the legal form from entrepreneurs to LLCs, there are some novelties in relation to previous business.

• Tax

The tax paid by the LLC is the corporate income tax and amounts to 15% of the base (taxable income) in accordance with the Law on Corporate Income Tax (“Official Gazette of RS”, No. 25/2001, 80/2002, 80 / 2002 – other law, 43/2003, 84/2004, 18/2010, 101/2011, 119/2012, 47/2013, 108/2013, 68/2014 – other law, 142/2014, 91/2015 – authentic interpretation, 112/2015, 113/2017, 95/2018, 86/2019, 153/2020 and 118/2021). If a member (natural person, owner) of the LLC wants to raise the profit, he is obliged to pay dividend tax, another 15% of the base determined in accordance with the Law on Personal Income Tax. This profit is not included in the basis for calculating the annual personal income tax.

• Bookkeeping

The LLC must keep books of its business. For newly established companies, the most cost-effective solution is to have an external bookkeeping agency keep their books.

• Residence / Work Permit

A foreign citizen who is the founder and / or director of a limited liability company has no obligation to have a residence or work permit in Serbia, in case his stay in Serbia does not last longer than 90 days in a period of 6 months.

• Cessation of activities

The LLC cannot register the cessation of activities, and as long as the LLC is active (i.e., no liquidation has been initiated) it is responsible for tax and other obligations. Therefore, these obligations cannot be equal to zero as it is possible in the case of entrepreneurs in the period of “dormancy”.

• Deletion / Liquidation

LLC Liquidation lasts a minimum of 4 months and there is no legal possibility to last shorter.

• Conclusion

It is important to think carefully about the change of the legal form from an entrepreneur to an LLC for all the above reasons. Once the legal form is changed, the reverse process is not possible, but the closure of the LLC in the liquidation or bankruptcy procedure must be carried out. After the closure, it is possible to register the entrepreneur again, but there is no legal continuity between the mentioned entities.