What's new in the process of allocation of incentives?

A new Regulation on Terms and Conditions for Attracting Direct Investment entered into force in mid-March (on 12 March 2016), providing for some important novelties.

The new Regulation omits primary agricultural production and fishing from the sectors not eligible to receive funding, and applications for incentives may be expected from these sectors in the future.

Another important change lies in the manner of measuring the level of (un)employment, because new jobs are defined as a net increase in the number of employees who are local nationals. There were no explicit provisions earlier that employees must be local nationals.

From the legal viewpoint, an important novelty is that the Regulation introduces the category of "period of guaranteed investment and employment" so far provided for only in the contract, however not in the Regulation. Now that it is incorporated into the Regulation, this period (normally spanning three or five years, depending on the contract) can no longer be a matter of negotiations. Please note that the "period of guaranteed investment and employment" covers the time after the implementation of the investment project, during which the beneficiary is bound by certain obligations.

The Regulation also introduces the term "investment of local importance" (only the "investment of special importance for the Republic of Serbia" was previously recognised) which allows for a local self-government to define, based on its programme of local economic development, the criteria by which an investment in its territory is the "investments of local interest" (such investment does not meet all the criteria of the Regulation in the first place).

The procedure of allocating funds has also been modified by introducing the so-called previous procedure when the investor submits to the Development Agency of Serbia a letter of intent, and receives in response a non-binding notification about the possible level of incentives. This was not possible earlier, and this is a helpful novelty for investors, who receive an opinion from the Agency on the proposed level of incentives before the public call for allocation of funds.

The essential provisions, defining the nature of incentives, have remained the same for the most part. Please find below the basic requirements for funds awarding so as to see if you meet such requirements, in case you are a potential applicant.

The level of funds that may be awarded is determined in relation to the eligible investment costs, defined as investments in tangible and intangible assets as of the date of signing of the grant agreement, or costs of gross salaries for new jobs created during the two-year period after achieving full employment.

Minimum investment requirements for which funds are awarded are determined according to the level of development of the local self-government units, as follows:

a minimum of EUR 150,000 of the eligible costs of investment and at least 20 jobs created in the units of local government that are classified in the IV group of development and the devastated areas, to be awarded incentives of up to 25% and 30% of the eligible costs of investment respectively, or up to 35% or 40% of the eligible costs of gross salaries respectively in a two-year period;

a minimum of EUR 300,000 of the eligible costs of investment and at least 30 jobs created in the units of local government that are classified in the III group of development, to be awarded incentives of up to 20% of the eligible costs of investment, or up to 30% of the eligible costs of gross salaries in a two-year period;

a minimum of EUR 600,000 of the eligible costs of investment and at least 40 jobs created in the units of local government that are classified in the II group of development, to be awarded incentives of up to 15% of the eligible costs of investment, or up to 25% of the eligible costs of gross salaries in a two-year period;

a minimum of EUR 600,000 of the eligible costs of investment and at least 50 jobs created in the units of local government that are classified in the I group of development, to be awarded incentives of up to 10% of the eligible costs of investment, or up to 20% of the eligible costs of gross salaries in a two-year period.

Beneficiaries of funds are required to provide a minimum of 25% of the eligible costs from their own resources.

It is worth noting that funds cannot be allocated to finance investment projects in the transport sector, hospitality industry, gambling, trade, production of synthetic fibbers, coal and steel, tobacco and tobacco products, weapons and ammunition, shipbuilding, airports, utilities sector and the energy sector, as well as business entities in difficulties.

The allocation of funds is conducted in accordance with the public call published by the Ministry of Economy on its website.
Once the public call is published, an application is submitted to the Agency on a prescribed form, together with the prescribed documentation. The Agency performs expert analysis and forwards the investment projects to the Council for Economic Development (RS Government agency) which decides on the allocation of funds according to available budgetary resources. The Council's decision is final.
The Agency then prepares the text of the contract on the allocation of the incentives, which is submitted to the RS Government for prior consent.
The Regulation provides that the allocated funds are paid out in three instalments, an instalment being determined as a percentage, in an amount proportional to the amount of the investment in fixed assets in each year of the investment project or in an amount proportional to the number of new employees in each year of the investment project.
The request for payment of each instalment must be accompanied by a report of the authorised auditor and a bank guarantee for the repayment of such instalment, as well as two registered blank promissory notes with a signed letter of authorisation for the payment of statutory default interest (promissory notes may be replaced with a bank guarantee covering the amount of the possible statutory default interest, which is a new solution introduced by the Regulation).
The deadline for implementation of investment projects and creation of new jobs is three years from the date of signing of the grant agreement, however it may be extended up to five years, subject to the Council's consent.
Once the procedure is over, the Ministry and the beneficiary of funds enter into the agreement on the allocation of the incentives, the mandatory elements of such agreement being prescribed by the Regulation.
It is worth noting that the beneficiary of funds is under the obligation to pay out a base salary at least equal to the minimum salary determined in accordance with the law, so that the total salary of an employee and other emoluments that have the character of a salary must equal at least 120% of the minimum salary.
Furthermore, an integral part of the agreement is the part of the business plan relating to the amount, structure and dynamics of the investment plan, the plan and dynamics of employment and projected gross earnings and the planned participation of domestic suppliers.

This calls for a more rigorous conformity with the business plan who’s drafting now requires more attention than used to be the case.
Finally, it should be noted that, although the Government issues a Regulation on incentives each year, there has been no public call since 2013. It remains to be seen whether the budget will allow a call to investors to be published before the end of 2016 under the present terms and conditions.
Please address any further queries related to incentives in Serbia and requests for a detailed analysis to marko.janiciievic@tsg.rs or office@tsg.rs

Marko Janicijevic, Attorney-at-Law marko.janiciievic@tsg.rs