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Mandatory Branch Incorporation

Mandatory Branch Incorporation

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Although a seemingly simple question, the obligation to incorporate a branch does not have a simple answer. Branch incorporation of business companies is foreseen by the Company Law (hereinafter: "Company Law").

The company branch office is a separate organizational unit of a company in the territory of the Republic of Serbia through which the company performs activities in accordance with the law. A branch does not have the capacity of a legal person and acts on behalf and for the account of the company in legal transactions, which is liable, without limits, for the obligations towards third parties resulting from the operations of its branch.

Amendments to the Company Law from 2018 introduced the obligation to register a branch with the Agency for Business Registers: "A branch of a domestic or foreign company is registered in accordance with the registration act." However, two lawyers - three opinions make a seemingly unequivocal sentence have two meanings: is there an obligation to only register an incorporated branch or is there an obligation to incorporate a branch? Does each separate place where the company carries out its activities must be treated as a branch and is the company obliged to register each such separate place as a branch?

In the proposed amendments to the law, it is explained that the mandatory registration of the branch is introduced in order to facilitate the monitoring of the activities of the branch, which is important from the point of view of tax policy and employment policy, insurance, social issues, etc.

A branch is formed by a decision passed by the general meeting unless otherwise provided for, which is registered. Therefore, companies can still form business units by the decision of the legal representative, which is not registered, for all those needs, i.e. premises, for which the obligation to incorporate a branch is not prescribed by law.

Additionally, the criteria set by the definition in the Company Law should also be taken into account; namely, if the separate place is not organizationally independent, whilst this independence certainly cannot be measured as in the case of a separate company but rather its separate part, it cannot even be viewed as a branch in the sense of the aforementioned law, and the question of its mandatory incorporation and registration would not even arise.

Furthermore, the Law on Tax Procedure and Tax Administration contains the obligation of the taxpayer to submit an application to the Tax Administration for the registration of data that is not reported to the Agency for Business Registers, on all business premises in which they stock or store goods or perform activities. Therefore, the regulation of this law allows the possibility for the company to carry out activities on a premise that is not registered as a branch in the Register of Business Entities but obliges them to report such premises to the Tax Administration.

Tax regulations distinguish between the concepts of branch and permanent business unit. Namely, the Law on Corporate Income Tax defines a permanent business unit as any permanent place of business through which a non-resident taxpayer carries out activities (branch, plant, representative office, place of production, factory or workshop, mine, quarry or other place of exploitation of natural resources). Therefore, a branch is only one of the forms of a permanent business unit. Each branch in the sense of the Company Law is also a permanent business unit in the sense of tax regulations if it was formed by a non-resident, but not every permanent business unit is a branch.

Finally, in certain situations, the legislator provided for the obligation to incorporate a branch through a lex specialis, in relation to which the Company Law represents a lex generalis. Such cases are rare, but they highlight special situations in which the obligation to incorporate a branch exists, as opposed to the general rule of the Company Law on the possibility thereof.

To begin with, the Law on Tourism stipulates the obligation of a tourist agency that performs tourism activities in its registered seat, but not as its main activity, to register a separate branch for it. Additionally, if it performs tourism activities outside its registered seat, it is obliged to register a branch for each place of business. An exception is provided only for the occasional performance of tourist activities at fairs and other public manifestations within the legal term.

The same law regulates the service of renting motor vehicles, i.e., rent-a-car. As in the previous case, the criteria for the obligation to incorporate a branch is the provision of services at the registered seat, but not as a predominant activity, or the provision of services outside the registered company’s seat.

Previously regulated by the same law as the field of tourism, since 2019 the field of hospitality is contained in a special Law on Hospitality, which similarly establishes the same criteria for branch registration when performing hospitality activities, as well as exceptions for the same, with special reference to catering activities in nautical and hunting tourism facilities.

What is interesting about the above-mentioned special laws is that companies which are entering tourism and hospitality professions are often not even aware that they are violating the relevant regulations, until the inspection authorities make them.

Furthermore, the Law on Road Traffic Safety establishes the obligation to incorporate a branch for training candidates for the driving exam outside the territory of the police administration unit where their registered seat is located, as well as obtaining a license to perform the above-mentioned activity for each of the branches.

Exceptions are established for conducting a practical exam outside a populated place that does not meet the requirements for conducting a practical exam, as well as for conducting practical training throughout the territory of the Republic of Serbia.

In addition, the same regulation regulates the performance of vehicle technical inspection as an activity of general interest that can be performed by a company in several facilities, where a separate branch is incorporated for each facility, and authorization must be obtained for each.

Finally, the new Law on Electronic Communications does not contain the obligation to register branches of companies that perform other activities in addition to electronic communications, which was contained in the previous law. The new provision is that the regulator may, under certain conditions and as an exceptional measure, impose on a vertically integrated company the obligation to separate its activities into a separate business unit, in the form of a related business company or branch, or the company may voluntarily carry out such separation. 

Having in mind all of the above, and especially the fact that the provisions of one law cannot be interpreted independently of the legal system in which they appear, the obligation to incorporate a branch as a general rule does not exist, while the obligation to register an already incorporated branch certainly exists. Therefore, the law does not impose on all subjects to form branches but to register them as such.

By Katarina Milic, Senior Associate, JPM & Partners

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