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Regulation of the Rights and Obligations of Directors Outside the Employment Relationship

Regulation of the Rights and Obligations of Directors Outside the Employment Relationship

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One of the questions that is often risen in practice is whether there is an obligation to conclude a contract with an individual who is registered as a legal representative, i.e., director of a company, and who does not establish an employment relationship in that company. In relation thereto, there are also inquiries whether it is mandatory to provide for a compensation for the work of a director who is not employed with the company, as well as what are the tax obligations of the company regarding the compensation that a director receives for performing the respective capacity.

We will endeavour to provide answers to the mentioned questions below.

What does the Labour Law prescribe?

Pursuant to the provisions of Article 48 of the Labour Law (Official Gazette of RS no. 24/2005, 61/2005, 54/2009, 32/2013, 75/2014, 13/2017 – decision of the CCS, 113/2017 and 95/2018 – authentic interpretation) (“Labour Law”), a director or other legal representative of the employer may establish an employment relationship for an indefinite or definite period. The employment is established by the employment agreement, whereby the employment relationship for a definite period can last until the expiry of director’s mandate, i.e., until his/her release from duty.

The mutual rights, obligations and responsibilities of a director who has not established an employment relationship and the employer are regulated by the contract. Such director is entitled to a remuneration for his/her work and other rights, obligations and responsibilities in accordance with this contract, which is executed on behalf of the employer by the competent authority established by the law or general enactment of the employer.

Remuneration for the work of non-employee directors

In accordance with the above, which was also confirmed by the Opinion of the Ministry of Labour, Employment, Veterans and Social Affairs no. 011-00-00416/2021-07 from 15/10/2021, a remuneration is a mandatory element of the contract on mutual rights, obligations and responsibilities of a director who has not established an employment relationship, as well as of the representation contract for a representative who has not established an employment relationship and is neither a founder nor a shareholder of the company.

Therefore, from the provisions of Article 48, paragraph 5 of the Labour Law, as well as from the previously mentioned opinion, it unequivocally follows that the remuneration is considered a mandatory element of the contract that regulates the mutual rights, obligations and responsibilities of a director who did not establish an employment relationship and the employer, whereby the above applies accordingly to other representatives of the company (who have not established the employment relationship in the company, and are not its founders or shareholders).

Tax treatment of the remuneration of non-employee directors

According to the Opinion of the Ministry of Finance no. 011-00-1137/2018-04 from 11/06/2018, when a natural person performs duties of a director based on the contract on the rights and obligations of director, without establishing an employment relationship in that company, there is an obligation to calculate and pay personal income tax on other income and related contributions for mandatory social insurance based on the agreed remuneration for such engagement, regardless of whether such natural person – director waives the contracted remuneration in favour of another person. Contributions for mandatory social insurance in this case include contributions for pension and disability insurance, as well as contributions for health insurance if the individual concerned is not insured on another basis. The basis of the contributions is the taxable income from the contracted remuneration, in accordance with the law governing the personal income tax.

In this regard, and according to the Opinion of the Ministry of Finance no. 011-00-151/2018-04 from 20/05/2019, the subject obligation also exists in case when the remuneration stipulated by the contract regulating the rights and obligations of a director without establishing an employment relationship is collected by a natural person – foreign citizen.

This article is to be considered as exclusively informative, with no intention to provide legal advice. If you should need additional information, please contact us directly.

By Lara Maksimovic, Senior Associate, PR Legal

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