Legal Issues and Recent Developments in Serbia Ljubljana, November Enterprise Management Incentives Ms Jelena Edelman, Senior Associate, Prica & Partners

Legal Framework Ljubljana, November 19, 2008 Labor Law – 2005 (LL) Personal Income Tax Law – 2001 (PITL) Foreign Exchange Transactions Law– 2006 (FXTL) There are no separate regulations applicable only to members of management. Recent Developments and Legal Issues in Serbia

Legal Framework Ljubljana, November 19, Participation in profit LL - Employer may determine the employees participation in companys profit made in a business year by the employment agreement or by its decision, in accordance with the law and a general act. (Article 14) 2. Bonuses & awards LL – Salary consists of earnings for performed work and time spent at work, earnings based on employees contribution to the employers business success (awards, bonuses etc.)..., all in accordance with a general act and the employment agreement. (Article 105) Further regulated by employers collective agreement or employers general act (Rules of Employment, Rules of Bonus Payment, Profit Participation Plan, Stock Option Plan, etc.) and/or employment agreement; 3. Stock options Recent Developments and Legal Issues in Serbia

Participation in Profit Ljubljana, November 19, 2008 Participation in profit Percentage of net profit (after tax) based on year end financial statement Minimum percentage – determined by employer, in practice not lower than 5 – 10% Manner of distribution - widely varies, for example participation proportional to participation of the employees salary in a total amount of salary funds at employer or according to specific criteria (quality of performed work, extent/volume of the work, attitude toward work obligations) Recent Developments and Legal Issues in Serbia

Participation in profit/Tax Treatment Ljubljana, November 19, 2008 PITL: Remuneration of employees based on profit participation (in cash or award in or purchase of stock option) is considered as income from capital and is subject to tax at the rate of 20% (Articles ). Not subject to mandatory social insurance contributions (Opinion of Ministry of Finance of ) Recent Developments and Legal Issues in Serbia

Awards and Bonuses Ljubljana, November 19, 2008 Awarded as a fixed amount; Usually as thirteen-month pay or as award for the project completed successfully or swiftly Appropriate for groups of employees (sectors, departments, business units...); Recent Developments and Legal Issues in Serbia

PITL –Salary is considered as earnings realized on the basis of employment relationship, i.e. as defined by LL. Also, salary includes other remunerations received in form of bonuses, cash certificates, shares… (Articles 13 and 14) Income Tax - 12% Mandatory social insurance contributions 35.8% (payable 17.9% by both employer and employee). Social security charges are capped – above the amount of five average salaries in the Republic of Serbia social security contributions phase out. (in 2007 = 2,324,640 RSD or EUR 27,300.00) Awards and Bonuses/Tax Treatment Ljubljana, November 19, 2008 Recent Developments and Legal Issues in Serbia

Recent trend in Serbia introduced by foreign companies, mostly US and EU based Local employment agreement entitles an employee to participate in a Stock Option Plan of a foreign founder Local employment agreement entitles an employee to participate in a Stock Option Plan of a foreign founder Two most common structures: realized directly through foreign parent company, or realized through domestic Serbian subsidiary/employer; Two most common structures: realized directly through foreign parent company, or realized through domestic Serbian subsidiary/employer; Lack of explicit legal regulations – general rules of employment, tax, and foreign exchange laws are applicable; Stock Options - General Ljubljana, 19. novembar 2008 Recent Developments and Legal Issues in Serbia

Stock Options/Tax Treatment Exercise of option The employee is taxed on the spread (the difference between the fair market value of the shares and the exercise price) at exercise. Depending on the structure two tax results: - direct payment by foreign company – income is classified as other income and taxed at the rate of 20% (Article 85 of Personal Income Tax Law). Reported to tax authorities by the employee; - involvement of Serbian subsidiary i.e. local employer – income is classified as salary and taxed accordingly (12% income tax and 35,8% social contributions). Taxes and social contributions are withheld by the payer. Grant of option – no tax Ljubljana, 19. novembar 2008 Recent Developments and Legal Issues in Serbia

Sale of Shares Employee is required to report to the tax authority any profit earned in the sale of shares and pay capital gain tax at the rate of 20% (capital loss is also possible; it can be written off within the following 5 years). Stock Options/Tax Treatment Ljubljana, November 19, 2008 Recent Developments and Legal Issues in Serbia

Reporting requirement imposed by the FXTL; Decision rendered by the National Bank of Serbia in 2007 determines more specifically the terms and conditions of reporting the investment of residents in the shares of a foreign company; Residents are responsible for the accuracy of information submitted in their reports. NBS Reporting Requirements Ljubljana, November 19, 2008 R E P O R T I N G Recent Developments and Legal Issues in Serbia

Annual Tax Imposed on all individuals whose total annual income (from all sources combined, except capital gains and income from capital) exceeds 3 (for foreigners 5) average annual salaries in Serbia. 10% up to six (for foreigners 8) average annual salaries 15% exceeding six (for foreigners 8) average annual salaries In 2007 the amount was ,00 RSD (approximately EUR) Ljubljana, November 19, 2008 Recent Developments and Legal Issues in Serbia

Ljubljana, November 19, 2008 Thank you for your attention. Have a successful conference!