Under the Serbian Law on Foreign Exchange Operations and its accompanying bylaws, Serbian residents have various reporting obligations towards the National Bank of Serbia (“NBS”), which is competent for controlling foreign exchange (“FX”) operations of residents and non-residents. It is not rare in practice that companies operating in Serbia are not aware of (all) such obligations, especially in the cases of first-time entrance to the market, which exposes them to potential liability for FX misdemeanours. The controls in this area are common while identified irregularities are followed by misdemeanour proceedings.
While various reporting obligations exist for different types of residents, in our experience mistakes are most common in the cases of local companies and branches of foreign companies registered in Serbia (which are considered as residents from FX perspective) in reporting on (i) direct investments of non-residents in Serbia, (ii) financial loans with abroad, and (iii) payment codes in transactions with abroad. For this reason, these residents and obligations are in focus here.
Every local company which has a non-resident as its direct shareholder, as well as every branch of a foreign company, is obliged to report on foreign direct investments of non-residents in Serbia to the NBS. The reporting is done electronically on DI-1 reporting forms, for every calendar quarter. Reporting deadlines are 10 April for Q1, 10 July for Q2, 10 October for Q3 and 10 January for Q4. Reporting is usually handled by an in-house finance team or an external accountant if engaged for such activities.
Whenever a Serbian company or (in limited permitted cases) a branch of a foreign company enters into a financial loan with a non-resident, it is obliged to report to the NBS on such financial loan, including among others on entering into the loan agreement, planned and realized utilizations and repayments, amendments to and termination of the loan agreement, intended loan purposes, etc. Similar reporting rules apply to inbound and outbound loans, while in practice inbound loans to Serbian resident borrowers are much more present. The reporting is done on KZ reporting forms through the commercial bank of the resident (borrower or lender), and the deadline is 10 days as of the signing of the loan agreement or other relevant change. Typically, KZ forms need to be signed by the resident, which places the process relatively in its control and makes it able to monitor compliance with the deadlines. However, in practice specifically interesting is the KZ-3B form, which is used for reporting on each utilization and repayment of the loan. This form is submitted electronically by the commercial bank of the resident, often without the resident even being aware of this. Nevertheless, if the deadline for the submission of this form is not met, the liability still lies with the resident (borrower or lender) and not with its bank. The delays occur in practice for various reasons, which is why it is prudent to confirm with the bank after every utilization or repayment of the loan that the KZ-3B form has been duly submitted to the NBS.
In addition, every payment transaction to or from abroad needs to be booked by a local resident under one of the payment codes prescribed by the NBS. When making or receiving a payment, the resident provides its bank with the payment code and is liable for choosing the appropriate one. This is relevant to note as there is often a misunderstanding in practice where residents expect the bank to direct them to the payment code to be used. Generally, attention should be paid when choosing the code as it is not always entirely obvious which category applies. For example, there are different codes for direct investments and for paying-in of foreign capital of the founder which does not increase the share capital, or codes for interest on short-term loans and for interest on long-term loans, etc. In cases when there is no directly applicable payment code, the approach supported by the NBS in practice is to use the closest available code, provided that it is clear that the transaction is allowed under FX rules. In cases of doubt, it is advisable to check the matter with the legal advisors or the NBS, as irregularities in executing payments with abroad are sanctioned.
Breaches of the above rules constitute FX misdemeanours punishable by monetary fines of up to approx. EUR 17,000 for the company or the branch of a foreign company, and by up to approx. EUR 1,250 for the responsible person. In case of multiple misdemeanours adjudicated in the same court proceedings, the penalties are limited to double of the above, up to approx. EUR 34,000 i.e. EUR 2,500. In our experience the actual penalties imposed by the court did not come close to the maximum ones, however, the mere occurrence of the proceedings mandates the allocation of certain administrative and financial resources. Also, established misdemeanour liability is recorded in the official misdemeanours records, which is particularly relevant for the directors and other responsible officers as it may be considered for their future functions.
In view of all above stated, the companies operating in Serbia should take care to get aware of the applicable reporting obligations in time, advisably even before the start of the local operations, and to implement the procedures to duly fulfil the abovementioned and all other reporting obligations in accordance with the law. While the reporting is relatively simple once implemented, the consequences of incompliances may be less so.
The information in this document does not constitute legal advice on any particular matter and is provided for general informational purposes only.
By Maja Jovancevic Setka, Partner, and Dimitrije Ilic, Associate, Karanovic & Partners