Openness to Foreign Investment                                                 

Serbia is open to foreign direct investment (FDI), and attracting FDI is increasingly a priority for the government of Serbia (GoS).  Serbia has a long history of international commerce, even under communism, and it once attracted a sizeable foreign company presence.  The State Union of Serbia and Montenegro dissolved in May 2006 after Montenegro proclaimed its independence following a referendum.  A new constitution for the Republic of Serbia was approved by referendum and adopted in November 2006. There have been no negative consequences in Serbia in regards to openness to foreign investment in the aftermath of the dissolution of the state union with Montenegro. 

Cumulative levels of FDI in Serbia improved significantly after $4.5 billion of FDI in a record 2006.  According to European Bank for Reconstruction and Development (EBRD) projections for 2007, Serbia was expected to receive some $3 billion of FDI.  This decrease in FDI was due to a slower pace of privatization following parliamentary elections at the beginning of 2007 and a delay in forming the government.  According to the EBRD, even with the lower number, Serbia is ranked forth in Southeast Europe, after Bulgaria, Romania and Croatia and before Bosnia-Herzegovina, Montenegro, Albania and Macedonia in total 2007 FDI.  Last year, FDI inflow per capita in Serbia was roughly $400, which is close to the average for the region.  FDI counted for roughly 10% of Serbia's GDP in 2007.   

Leading investor nations in Serbia include: Norway, the United States, Germany, Austria, Greece, the Netherlands, the United Kingdom, Slovenia, France and Croatia.  Austria assumed the leading investor nation position for 2007.  On September 25, 2007, the Government of Serbia and Indian firm Embassy Group signed an MOU on information technology park construction.  Embassy Group was planning to build their first Technological Park in Europe at an area of 270ha in Indjija, but backed out as a result of the political uncertainly in Serbia following Kosovo's declaration of independence.  In the first year, the project plan envisages construction of 25,000 square meters of business area and employment of 2,500 employees.  The five year plan predicts building a business area and employing tenfold of the initial investment - 250,000 square meters and 25,000 people.  This is planned as the largest Greenfield investment in Serbia.  The planned investment is a minimum of $600 million.

The banking sector has attracted investment from Intesa (Italy), Credit Agricole (France), HVB Bank (Germany/Austria/Italy), Erste Bank (Austria), Nova Ljubljanska Banka (Slovenia), EFG Eurobank (Greece), Findomestic Bank (Italy), Pireus Bank (Greece), OTP Bank (Hungary), and others. U.S.-based Citibank, part of the world’s largest financial services company, Citigroup, opened a representative office in Belgrade in December 2006.  In mid 2007, Belgian financial group KBC purchased Belgrade based A Bank for almost $140 million.  On November 26, 2007 the Serbian Tender Commission decided that DDOR, Serbia's second-largest insurance company, would be sold to Fondiaria, Italy's third largest insurance company.  Fondiaria was the sole bidder for DDOR with a final bid of $377 million.  

In the trade sector, France's Intermarche, German Metro Cash and Carry, Greek Veropulos, and Slovenian Merkator continued with investments in 2007.  On October 29, 2007 Verano Motors, a Peugeot car distributor, bought bankrupt department store chain "Robne Kuce Beograd" for $520 million in the fifth largest privatization sale in Serbia.  Verano was financially backed by the Greek Marfin Investment Group.  The purchase gives Verano 38 stores and facilities across Serbia and includes several properties in Montenegro, totaling almost 240,000 square meters of premium real estate. 

A tender for the privatization of the state-owned oil company NIS has not been issued yet.  On July 20, 2006, the Government of Serbia approved a privatization strategy for NIS. It called for a phased-privatization of a minority stake (up to 49%), with management control ceded to the buyer from the outset.  The tender was supposed to be announced in October 2006 but was postponed repeatedly after elections in January 2007. Disputes over the type and speed of privatization among partners in the ruling coalition were the main reasons for the delay in NIS privatization.  In the meantime, Russian energy giant Gazprom showed interest in NIS, and at the beginning of December 2007, Gazprom offered a proposal for long-term energy cooperation with Serbia where Gazproom would become the majority owner of NIS without an open tender.  On December 29, the Serbian Government approved a platform for negotiations on the Russian energy proposal for cooperation in the oil and gas sector and Presidents Tadic and Putin signed the framework agreement on January 25, 2008. 

On December 26, the Serbian Parliament adopted the Law on Distribution of the Free Shares to Citizens.  The law envisages that some 4 million people that have not received any shares in the current process of privatization will be eligible to take part in distribution of 15% of the capital of six state-owned companies: Petroleum Industry of Serbia (NIS), national air carrier (JAT), Electro-Power Industry of Serbia (EPS), Telecom, Belgrade Airport "Nikola Tesla" and pharmaceutical company Galenika.  Each citizen will get and estimated $1,430 and current and former employees of the above mentioned companies will get between $5,700 and $7,100.  This law is connected with the plan for privatization of large state-owned companies between 2008 and 2010.  The Serbian Government proposed that majority of NIS and JAT would be sold to a strategic partner and a 15% share of each company would be distributed to citizens.  The second group of companies consists of electricity firm EPS, Telecom Serbia, the Belgrade airport and pharmaceutical company Galenika, where a 15% share would be sold through an initial public offering (IPO) on the stock market and an additional 15% would be distributed free to citizens.  IPOs of the big state-owned companies would contribute to the growth of the Belgrade Stock Exchange (BSE).    

Serbia has enacted specific legislation outlining guarantees and safeguards for foreign investors.  The former Yugoslav Law on Foreign Investments (January 2002), amended and formally incorporated into Serbian law (2003), establishes the framework for investment in Serbia.  The law eliminates previous investment restrictions; extends national treatment to foreign investors; allows the transfer/repatriation of profits and dividends; provides guarantees against expropriation; and allows customs duty waivers for equipment imported as capital-in-kind.  In order to attract FDI, Serbia developed a range of incentives for investors in 2006, including cash grants to investments resulting in significant job creation, as well as tax incentives in the form of credits, cuts in payroll contributions and reduced corporate tax rates.  Further details are included in Section A.5.

Serbia does not employ screening mechanisms, and foreign participation is welcomed in ongoing privatization.  However, a foreign investor or entity may not, alone or with another foreign investor, establish an enterprise in the arms sector, or in areas defined as restricted zones by law.  A foreign investor may establish an enterprise in the above-mentioned field or areas, or invest in it together with a domestic entity, but without acquiring the majority rights to manage such an enterprise, and only with the consent of the Ministry of Defense.

Serbia's economic team views foreign capital as vital to restructuring and, as a result, has expressed their commitment to remove barriers and facilitate investor interest.  The government recognizes the need to reform a wide body of laws to improve the overall business regulatory environment and thereby enable private sector companies to grow and to compete. 

The Serbian Investment and Export Promotion Agency (SIEPA) was established to provide direct assistance to investors.  SIEPA works closely with individual donors on various activities.  In addition, the Agency for Privatization provides information and works with potential investors to educate them about the privatization program and related opportunities.

Contact information for SIEPA is as follows:  

Serbian Investment & Export Promotion Agency (SIEPA) 

Vlajkoviceva 3/V

11000 Belgrade Serbia

Tel: (381)(11) 3398-510; 3398-550

Fax: (381)(11) 3398-814

[www.siepa.sr.gov.yu] 

SIEPA is relatively small, however and lacks resources to shepherd investors through the process from start to finish.  Potential investors should discuss specific projects/interests with relevant line ministries to obtain the necessary support from the government.

Conversion and Transfer Policies

The Serbian foreign investment law guarantees the right to transfer and repatriate profits from Serbia into freely usable currency and at a market clearing rate.

In 2002, Serbia initiated a first round of liberalization of foreign trade transactions by adopting reforms to the Law on Foreign Exchange, which established a foreign exchange market and provided for current account convertibility.  Further liberalization occurred in July 2006, when a new Law on Foreign Exchange further eased restrictions on foreign exchange transactions by legal entities.

The most important change to the law was liberalization of capital outflow, including:

(1) Payment and transfer of capital with regard to direct investments of residents and legal entities, entrepreneurs and physical entities shall be executed freely, as well as non-residents in Serbia;

(2) Payments for the purpose of acquiring ownership of real estate of residents abroad and non-residents in the Republic shall be executed freely;

(3) Residents and legal entities, entrepreneurs and physical entities may effect payment for the purpose of purchasing equities abroad which do not represent direct investment, as well as long-term debt securities issued by OECD member countries and international financial organizations, or securities whose level of risk rating and issuer country may be prescribed by the National Bank of Serbia;

(4) Non-residents may effect payment for the purpose of purchasing long-term debt securities in the Republic, as well as equities in line with the law governing the market of securities;

(5) However, non-residents may not effect payment for the purpose of purchasing domestic short-term securities.

This law permits non-residents to keep foreign exchange and dinar accounts without restrictions in one or more banks. These accounts can be used to make or receive payments in foreign currency.

Payments, collections and transfers on current transactions between residents and non-residents are executed freely.

Non-residents, as well as residents or branches of a foreign legal entity, that transact business through a nonresident account are allowed to transfer funds abroad from such an account, provided that tax liabilities towards Serbia arising from business activities have been settled. This includes return of investment funds, as well as transfer abroad and repatriation of profit from direct investments.

The law also extends the period by which exporters must repatriate export earnings and importers must proceed with importation after payment, from 90 to 180 days.

As a member of the IMF, the National Bank of Serbia accepts the obligations of Article VIII (2), (3) and (4) of the IMF Articles of Agreement.  IMF members undertaking these obligations commit to refrain from restrictions on payments and transfers for current international transactions, and from engaging in discriminatory currency arrangements or multiple currency practices without IMF approval.

There is no difficulty in obtaining foreign exchange; it may be purchased through exchange bureaus by physical persons and through commercial banks by legal persons.

Expropriation and Compensation                                                 

Serbia provides legal safeguards against expropriation that are codified in law.  There have been no cases of expropriation of foreign investments in Serbia. 

Serbia has outstanding claims, however, related to property nationalized under the Socialist Federal Republic of Yugoslavia.  On May 30, 2005, Serbia adopted the Law on Reporting and Registration of Nationalized Property that allowed citizens until June 30, 2006, to register claims for property nationalized after March 9, 1945.  According to the Property Directorate for the Republic of Serbia, some 78,000 claims were received. The estimated value of the nationalized property is between $20 to $50 billion.

A separate Law on Restitution of Property to Churches and Religious Organizations was adopted in May 2006 and entered into force on October 1.  Based on the law, the Directorate for Restitution was established in December; it requested that Churches and other religious bodies, including Islamic Foundations, submit claims for restitution and compensation by September 30, 2008.

On May 10 2007, the outgoing caretaker Serbian government "gave support" to a draft law on restitution, leaving the current government to approve it and send it to Parliament for adoption.  From October through December 2007, the Ministry of Finance organized five working consultations on the current draft law.  The purpose of these consultations was to solicit feedback on the draft from legal and economic experts, restitution claimants, claimants' rights associations and from government institutions that will implement and enforce the law.  A Ministerial Working Group, with representatives from various ministries, pledged to consider feedback from the working consultations in formulating the final draft, which later will be released for further public debate.  The final draft law should be ready for government approval in early 2008.  

The Law on Foreign Investment provides safeguards against arbitrary government expropriation of foreign investments.  Serbia’s Law on Expropriation (2001) defines justifications for expropriation and lays out procedures that must be followed under law.  The law cites various economic and security circumstances affecting Serbia’s “common interests” in which expropriation is permitted: education, public health, social welfare, culture, water management, sports, transport, power and public utility infrastructure, national defense, local/national government needs or autonomous agencies, and exploration for or exploitation of mining and other resources.  Special procedures are outlined for expropriations related to natural disasters.  The Government of Serbia issues a determination on “common interests;” the law designates Serbia’s Supreme Court as the appellate mechanism. 

Following this determination, a proposal for expropriation may be filed with the competent local authorities.  The authorities are obliged to hold proceedings and issue a decision.  The Ministry of Finance is designated to resolve complaints filed against first-instance decisions.

In the event of an expropriation, Serbian law requires that compensation be provided in the form of similar property or cash approximating the current market value of the expropriated property.  The law stipulates various criteria for arriving at the amount of compensation with respect to different types of land (agricultural, vineyards, forests) or easements that affect land value.  If agreement on compensation is not reached within two months of the expropriation order, the local municipal court will intervene and decide the compensation. 

Dispute Settlement                                                                         

Arbitration

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The Foreign Trade Court of Arbitration (founded in 1947) is located within the Serbian Chamber of Commerce.  Arbitration is voluntary and conforms to the UN Commission on International Trade Law (UNICTRAL) model law. The court focuses on foreign trade or international commercial disputes (including investment) involving domestic and foreign parties.  The court’s arbitration rules promote a speedy and efficient process (no more than one year).  Arbitration commences when the parties have mutually requested arbitration and accepted the court’s jurisdiction. Its decision is final and binding. 

Once the court decides the issue, the arbitration award must be executed upon notice to the losing party, which is given a deadline to comply.  If no payment is made within the time allotted, then the party benefiting from the decision notifies the local commercial court.  The court then orders payment.  The same procedure applies for decisions of foreign arbitration courts (as per the 1958 New York Convention).  Complaints against the court of arbitration are not recognized unless a procedural flaw is alleged. 

Serbia is a signatory to the following international conventions regulating the mutual acceptance and enforcement of foreign arbitration:

-- 1923 Geneva Protocol on Arbitration Clauses,

-- 1927 Geneva Convention on the Execution of Foreign Arbitration Decisions,

-- 1958 New York Convention on the Acceptance and Execution of Foreign Arbitration Decisions;

-- 1961 European Convention on International Business Arbitration; and,

-- 1965 Washington Convention on the International Center for the Settlement of Investment Disputes (ICSID). 

In May 2006, Serbia enacted its first Law on Arbitration permitting the use of institutional and ad hoc arbitration in all kinds of disputes (commercial, labor, etc.).  Тhe new law is based on the UNCITRAL model law and is designed to enhance the availability of arbitration as a serious alternative to litigation.  The only mode of domestic arbitration that is currently available to Serbian parties is through the Chamber of Commerce of Serbia (which has its own list of accredited arbitrators that are appointed for a four year period.)

Regarding implementation of the Law on Arbitration, the Chamber of Commerce of Serbia is considering provisions of the new Law, but is still conducting arbitrations under the old regulations from in 1997.  The Serbian Chamber of Commerce does not have information on the number of disputes in Serbia solved through arbitration; however, in general it is used much more often by foreign companies.

Legal System

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Serbia's constitution serves as the foundation of the legal system and independent judiciary.  Like most of Europe, Serbia adheres to European civil law.  However, higher court decisions can be used as “guidance” by lower courts. 

Serbia’s judiciary historically has lacked independence and was subjected routinely to political manipulation during the communist and Milosevic eras.  Judges were appointed based on party affiliation.  The Milosevic regime severely undermined the courts, with judges often rubber-stamping regime actions.  Judges who challenged the regime were removed.  The GOS is now focusing on a range of issues to overhaul the court system: accountability, salary levels, training, selection and appointment, execution and enforcement of judgments, budget, court organization and responsibilities, and ethics.  The U.S. Government, through USAID and the Department of Justice, is providing assistance on court reform, primarily to commercial courts but also general jurisdiction courts and magistrates.

USAID’s Commercial Court Administration Strengthening Activity (CCASA) works primarily with the Ministry of Justice and the Commercial Courts to improve the operations and financial management of the Commercial Court system in Serbia through computerization and technical assistance for training and professional development; performance monitoring; amending outdated laws, regulations, and procedures; and public education.  The Strengthening the Serbia Legal System project, implemented by the American Bar Association-Central European and Eurasian Law Initiative (ABA-CEELI), works with the Judges’ Association of Serbia (JAS), the Prosecutors’ Association of Serbia (PAS), the Magistrates’ Association of Serbia (MAS), and the Young Lawyers of Serbia (YLS), to help them develop as self-sustaining organizations that can respond to their members’ needs and to provide important training.

USG assistance has also targeted the reduction of backlogs in the non-commercial courts and provided training on a wide variety of topics to judges and magistrates.  A program to help improve case processing, open courts to more public inspection and free courts from political and executive control by establishing an independent court budget office is due to start during 2007.

The US Department of Justice (DOJ) provides assistance to Serbia's criminal justice system to improve the capacity building of courts, prosecutor's offices and police to more effectively combat crimes including corruption, money laundering and financial crime.  This assistance includes training, equipment donations, study visits and regional cooperation activities.  DOJ also provides legislative assistance such as expertise on the reform of Serbia's Criminal Procedure Code to ensure greater efficiency in criminal proceedings.

 The Judicial System

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Serbia's court system consists of: municipal courts (138), district courts (30), commercial courts (17), the High Commercial Court (1), the Supreme Court (1) and the Constitutional Court (1).  Municipal courts are the court of first instance for most civil and criminal matters. District courts hear appeals from the municipal level, but also serve as courts of first instance for serious civil and criminal cases.          

The following paragraphs describe Serbia's court structure under current legislation.  The Supreme Court is the highest court in the republic, with jurisdiction over all civil and criminal cases, uniform implementation of law, equal protection, questions pertaining to judiciary practice, and jurisdictional issues between lower courts. The court hears appeals from the District Courts and the High Commercial Court.  The Supreme Court also has a division that reviews decisions of administrative bodies. The Constitutional Court, which is distinct from the Supreme Court, issues binding interpretations of the constitution and rules on challenges to the constitutionality of laws and regulations.

Court structure and jurisdiction is expected to change under implementing legislation that must be drafted following Serbia's adoption of a new constitution in October 2006.  The only courts established by the constitution are the Constitutional Court, described in more detail below and a Supreme Court of Cassation.  The new Constitution establishes the Constitutional Court as the court of last resort, and the Supreme Court of Cassation is expected to replace the current Supreme Court as the court of last resort.

The Constitutional Court rules on the compliance of laws and other regulations with the Constitution, with generally acknowledged rules of international laws and with certified international treaties; of certified international treaties with the Constitution; and of regulations with the law.  The Constitutional Court also resolves conflicts of jurisdiction between courts and other state bodies, conflicts of jurisdiction between republic-level bodies and provinces or local self-governance level bodies, rules on election disputes for which no court jurisdiction is defined by law, and decides on banning activities of a political party, religious organization, union organization or citizens’ association.  Decisions of the Constitutional Court are final.

The new Law on the Organization of Courts establishes (entered into force on January 1, 2007) new Courts of Appeals to review District Court decisions; decisions of those courts may be appealed to the Supreme Court.  An Appellate Court shall be established for the territory of several district courts.  The Courts of Appeals will be located in Belgrade and three other cities (Nis, Novi Sad and Kragujevac).

The new law also establishes an additional court, the Administrative Court, with original jurisdiction in cases arising from decisions of administrative bodies.  The Supreme Court will hear appeals from the Administrative Court.  In addition, Courts for Misdemeanors and a High court for Misdemeanors of the Republic of Serbia will be established as of January, 2007.

 Most commercial cases are heard by 17 regional commercial courts of first instance.  The commercial court system has four divisions: litigation; commercial law offenses; bankruptcy/liquidation, and execution of decisions. Approximately 240 judges sit in the courts, 62 of them in Belgrade.  The High Commercial Court reviews decisions of the first instance commercial courts, and its rulings may be appealed to the Supreme Court.  Corruption in Commercial Courts has been an issue.  (See Section A.11.a.)

Execution of Judgments

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Serbia has a Law on Execution, entered into force in February 2005, which established procedures for the execution of claims.  Generally, to execute judgments, a final judgment is required so that the court can order payment, seizure of goods/property or direct that action be taken or cease.  If a lower court's decision is confirmed on appeal, the case is returned to the first-instance court for the final judgment.  The judgment holder must then proceed to the competent court and submit a petition for execution.  The court order is actually carried out by officers of the court, who may seek police assistance in executing the writ (e.g., seizing property).  A separate expedited enforcement procedure has been enacted that allows claimants to submit certain types of “authenticated documents“ to the court and initiate execution without a first instance court procedure.

Based on the findings of a baseline assessment carried out by USAID's Bankruptcy Enforcement and Strengthening Activity (BES) Project, the last revision of the Law on Enforcement Procedure in 2004 is well designed and generally functional, and includes sensible innovations such as an expedited enforcement procedure that for a limited set of cases can bypass the litigation process.  The recent development of institutions that support the process of enforcement, including the Enforced Collections Division of the National Bank of Serbia, the Central Securities Register, the Business Register, the new cadastre, and the collateral registry, all contribute significantly to a generally favorable and improving environment for collecting financial judgments.

Nevertheless, major problems remain.  The system of enforcement officials in both commercial courts and courts of general jurisdiction functions poorly.  Enforcement officers face an overwhelming caseload with inadequate resources and poor institutional support, resulting in long delays and ineffective performance.

Recognizing and enforcing foreign court judgments in Serbia is governed by the Law on Resolving Conflicts between National and Foreign Legislation and the Arbitration Law.  According to the Law on Execution, if an enforcement creditor’s motion to enforce is based on a foreign executive title, he must submit it in the original or a certified copy, translated into the language which is in official use in the court, together with proof of the finality and enforceability under the law of the country of judgment.

A foreign executive order previously recognized by the domestic court shall be enforced in the same manner and procedure which is applicable to enforcement of domestic executive orders.  An enforcement creditor may initiate an enforcement procedure before a competent court in the Republic of Serbia on the basis of a foreign executive title that has not been previously recognized by the domestic court.  When the motion to enforce has been filed on the basis of a foreign executive order that has not been recognized, the court shall decide on recognition of such document as a preliminary matter.  During the course of deciding on a foreign executive title that has not been previously recognized by a domestic court, the court conducting enforcement shall consider legal obstacles to recognition that are of concern ex officio.

In 2007, several cases were brought to the Strasbourg Court for Human Rights, which obliged the Serbian Government to pay damages for litigation and enforcement proceedings that lasted 10 years and longer.  This brought public attention to the lack of efficiency of the Serbian enforcement system and the Ministry of Justice decided to take action.  In September 2007, the BES Project jointly with the Serbian Ministry of Justice started a series of roundtables and conferences attended by the professionals in the enforcement area (bankers, state and court representatives etc), with the aim to build the consensus for the major change of the system – introduction of private enforcement officers, which is expected in 2008.

 Law on Business Companies

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On November 15, 2004 the Serbian Parliament adopted a Law on Business Companies that provided greater clarity both in organizing and operating a company and in settling disputes in both small and large firms.  The law is more consistent with international practices and adds modern provisions for corporate governance and protection of investors. 

The law made more flexible Limited liability Company (LLC) provisions, and added a new provision for closely-held (closed) joint stock companies.  The minimum capital requirement for establishment of a Serbian LLC is only 500 euro or its equivalent.

The law provides for two types of joint stock companies: closed and open. This is a change from the previous law, and it follows other European legislation.  A closed joint stock company is much like an LLC, but it can be easily converted to an open joint stock company in order to be taken public.   

The Serbian closed joint stock company has a required minimum capital of 500 euro equivalent, and it is free to impose restrictions on transfer of its shares – for example, a requirement of board approval, or a right of first refusal in favor of other shareholders, whenever a shareholder wishes to sell to a third party.  It may not, however, offer its shares publicly, nor have more than 100 shareholders.  In most other respects a closed company resembles an open company, and a closed company may become an open company at any time so long as it adopts the rules and requirements for an open company.

An open company, by contrast, is subject to detailed capital maintenance requirements, may sell its shares to the public, and may not impose any restriction on the resale of its shares. 

Under the law, a joint stock company is permitted to issue only one class of common stock, which may have only one vote per share.  Preferred stock must be non-voting, with certain exceptions, and preferred stock always has preference over common stock with respect to dividends and distributions on liquidation of the company. 

A number of other provisions encourage good corporate governance and protect investors, mirroring current international best practices:

-A legal duty of care loyalty to the company, including provisions on personal conflict of interest, have been added.  Provisions also hold directors (and in some cases other executives) more accountable to shareholders.

 -Directors can be elected only by shareholders.

 -Cumulative voting is specifically permitted and is required in large joint stock companies.

 -The structure of the board is simplified, making a supervisory board optional.  The distinction between roles of directors (who are elected by the shareholders) and the management team (who are appointed by the directors) is spelled out clearly.

-Directors have terms of one year and face re-election at each annual shareholder meeting.

 -Also, shareholders can remove a director at any time without showing cause.

 Small and closely-held companies (whether partnerships, LLCs or joint stock companies) may be able to mix shareholding, directing and management.  Large joint stock companies are required by law to have a number of independent directors, and the law defines the term “independent director” in line with current practice in Europe and the United States.

The provisions also allow for lawsuits against directors and other executives – including controlling shareholders in some cases - based upon international models.  Under the law, a separate “supervisory board” is not required in a joint stock company.  Instead, a company may have a supervisory board, internal auditor or audit committee that acts as an independent body with specific legal power to provide financial and legal oversight and supervision, including oversight of the company’s outside audit firm and of the company’s legal compliance. 

The law details procedures for convening and conducting shareholder meetings.  More detailed restrictions are placed on proxies to prevent abuse in voting shares of employee-shareholders.  The law requires that a proxy be in writing and can be revoked by the shareholder at any time, even at the shareholder assembly.  The law also expands the prohibition against managers’ voting employees’ shares.  Finally, the law contains a number of provisions to comply with requirements of the European Union Company Law Directives.

In 2006, a total of 11,000 new companies were founded, a 4.7% increase from 2005, according to the Agency for Business Registers.  The agency reduced the time to register a new business from 51 days in 2005 to 18 in 2006.  The law stipulates that this timeframe be reduced to five days. 

Performance Requirements and Incentives                               

Serbia does not impose any performance requirements as a condition for establishing, maintaining or expanding an investment.

In order to provide further financial incentives for greenfield investment in specific industries, the Serbian Government adopted a decree in late June 2006 to permit cash grants to investment projects in all areas, except for trade, tourism, hospitality and agriculture.  Eligible companies are those establishing new ventures in manufacturing, in services that can be marketed internationally, and in research and development (R&D).  For each of these areas, the incentives and conditions are as follows:

 Investments in manufacturing:

--  Available incentive: starting at EUR 2,000, up to EUR 5,000 for each new employee,

--  Minimum investment: between EUR 1 million and EUR 5 million, depending on the unemployment rate in the municipality where the investment is made,

--  Minimum number of new positions: 50.

  Investments in international services:

--  Available funds: starting at EUR 2,000, up to EUR 10,000 per every new employee,

--  Minimum investment: EUR 1 million

--  Minimum number of new positions: 10.

 Investments in the R&D sector:

--  Available funds: starting at EUR 5,000 up to EUR 10,000 per every new employee,

--  Minimum investment: EUR 1 million,

--  Minimum number of new positions: 10.

 SIEPA concluded 18 contracts with foreign and domestic companies in 2007 worth $214 million which will enable 2,500 new positions.  The same incentives are valid for brownfield investments.

Serbia’s tax law has been amended to offer several tax incentives to new investors.  Corporate profit tax is levied under current law at the uniform rate of 10%, with non-residents taxed only on income earned in Serbia.  Under the current law, companies are exempt from corporate profit tax for up to 10 years, from the first year in which they realize profit, if: 1) they invest in fixed assets an amount exceeding 600 million dinars (approximately $11 million) and 2) during the investment period employ at least 100 additional employees for an indefinite period.

Companies that do not meet the requirements for the 10-year exemption still may use an investment tax credit that permits a reduction in tax due equal to 20% of the amount invested in fixed assets for the respective tax period.  This reduction may exceed 50% of the total tax liability.  If not used entirely in the course of one year, this tax credit can be carried forward for up to 10 years.

A number of sectors (agriculture, production of yarn and fabrics, garment manufacture, leather processing, production of base metals and standard metal products, production of any sort of machinery, electronic goods, medical instruments, or motor vehicles, recycling, and video production) may obtain a tax credit in the amount of 80% of investments made in fixed assets, with the unused portion to be carried forward up to 10 years.  Small enterprises outside of these sectors may receive tax credits equal to 40% of the amount invested in fixed assets in the current year (credit not to exceed 70% of the total tax liability).

In addition, the tax law offers incentives for employing new workers.  A taxpayer who employs new workers is entitled to a tax reduction equal to 100% of the gross salaries.  This tax credit is recognized for two years from the date of employment of new workers, provided that employment is not reduced during that period.

A taxpayer generating profit from a newly-established operating unit in an underdeveloped region (as designated by the Serbian Government) will receive a tax credit for two years in an amount proportionate to the profit of that unit in the overall profit of the company.

The tax law also provides for accelerated depreciation of fixed assets, tax exemptions for concession-related investments, exemptions from social insurance contributions, income tax credits, and customs duty exemptions for certain goods and equipment imports.  Drawback provisions of various kinds are also granted in the customs law, providing for a suspension of duties on certain inputs imported for processing and re-export.

Modifications to the Law on Income Tax in July 2006 provide additional, age-based tax incentives to employers.  Employers are exempt from social contributions for three years when hiring new employees younger than 30 years of age or older than 50.  For new employees aged 45 to 50, employers pay only 20% of required contributions for three years.  After January 1, 2007, the contribution rate fell from 73 to 61 cents on each payroll dollar.

In addition, the government has obligated EUR 45 million for municipalities to develop industrial parks where various companies could be concentrated in one location sharing the same infrastructure.  One such park is planned in the Belgrade suburban municipality of Indjija. 

 Law on Concessions

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The Law on Concessions was adopted by the Serbian Parliament in May 2003.  It eases the process of obtaining and using concession licenses. It also regulates the conditions and procedures for obtaining a concession to exploit natural resources, use property in the public domain and or conduct activities of general interest.

The law defines a concession as the right to use natural resources, assets of general use or to perform activities of common interest, which a competent state body (grantor) concedes to a domestic or foreign person (grantee) for a limited period, under terms prescribed by law and upon the payment of a concession fee.

The object of a concession may be:

 1) exploration for and exploiting of raw materials (minerals);

 2) building, renovating, maintaining and use of: various water supply facilities, roads, public railway infrastructure, air traffic facilities, river traffic facilities and ports, telecommunication facilities, oil pipelines, gas pipelines and other gas and oil facilities, public utilities, power-generating and heating facilities, riverbanks, medical institutions, sports and recreation facilities, sports fields and areas, tourist facilities and infrastructure;

3) thermal springs;

4) other activities specified by the law as activities of common interest.

Right to Private Ownership and Establishment                          

On November 8, 2006, Serbia adopted a new Constitution that  will, for the first time since World War II, guarantee private ownership of both agricultural and urban construction land.  The Constitution permits both foreign legal entities and persons to own real estate, in accordance with prevailing laws or international agreements.  Foreigners can acquire concession rights on natural resources and on resources of the common interest, as defined by the law.

This will replace the old land regime, under which only ownership rights for buildings and other immovable assets to be used in business operations, or as residential properties, was permitted, and where rights of use for up to 99 years were granted to legal persons.  New laws are currently being drafted to address the areas of urban planning and legalisation of illegal buildings, construction licensing, restitution and denationalisation of city construction land, and working procedures between relevant institutions in the field of urban construction.

Mortgages/Secured Transactions

------------------------------

The mortgaging property and chattels was formerly regulated by Chapter XXVIII of the Yugoslav Law on Contract and Torts.  In June 2003, Serbia enacted a secured transactions law, the Law on Registered Charges on Movable Assets.  A Business Services Agency was established in January 2005, which maintains a collateral registry in addition to registering new businesses.

In December 2005, Serbia adopted a Law on Mortgages that allows banks to issue mortgages on buildings under construction.  The previous law did not permit the registration of unfinished buildings in land registries, making the securing of loans during construction difficult.  In the event a debtor is unable to repay the loan, the new law permits sale of the mortgaged property within 6 months instead of the former 3-5 five-year period.  This law provides incentives for housing construction, by ensuring better legal protections for creditors and debtors.  The law also broadens the availability of mortgages through more flexible conditions for such loans, which are permitted not only for completed construction but also for projects under construction, including subdivisions of a property, unregistered objects and land.

The government hopes that this law will lower interest rates, by better protecting creditors.  An owner who grants a mortgage to a lender will not be able to change the physical structure of the property without the creditor’s consent, but is allowed to rent it or sell it.  If the pledged real estate is subject to bankruptcy, the law states that the creditor has priority in any distribution. The law also permits establishment of a Central Mortgage Register.

These laws substantially improve the inadequate scope of previous Yugoslav law.  These laws address claims against moveable property.  The law also prioritizes claims based on possession.  With respect to land, the central registry is not current.  Serbia, working with World Bank assistance, is modernizing its cadastral systems. 

 Protection of Property Rights                                                       

Intellectual Property Rights

-----------------------------

The legal regime for Intellectual Property Rights protection has improved substantially in recent years as Serbia has revised laws to meet WTO TRIPs standards.  In practice, however, enforcement is steadily improving but  actual protection is insufficient.  Pirated optical media (DVDs, CDs, software) as well as counterfeit trademarked goods, particularly sneakers and clothing, are common.  Customs, police and judicial authorities are obtaining the necessary tools for enforcement, but institutional capacity is still developing.  Strengthening IPR protection continues to be a challenge.

Intellectual property rights are covered by a series of six laws.  The Law on Copyright and Related Rights, the Law on Patents, the Law on Trademarks, the Law on Legal Protection of Designs, and the Law on Protection of Integrated Circuit Topographies were approved in 2004; all are fully WTO-TRIPs compliant.  A Law on Geographical Indications adopted in June 2006 is WTO-TRIPs compliant.  In order to complete the legal framework for IPR protection the only missing law is a Law on Optical Discs.

Enforcement

-----------

Complaints of IPR infringement must be brought before the commercial or district court (depending on the legal status of the parties.  Procedures for enforcement of intellectual property rights are governed in Serbia by the Law on Civil Procedures.

The Law on Civil Procedures meets the procedural requirements of TRIPS Article 42 (written notification regarding a dispute and protections for evidence and the rights of the parties involved).  With respect to providing evidence that is under the control of the opposing party (referenced in TRIPS Article 43), the laws allow the Court to compel production of documents or other evidence within a given time limit. The laws regulating specific areas of intellectual property rights (Law on Copyright and Related Rights, Patent Law, Trademark Law, Law on Legal Protection of Designs, Law on Geographical Indications and Law on Protection of Topographies of Integrated Circuits), provide specific legal remedies to rights holders. 

Criminal sanctions, including in some cases imprisonment, may be imposed in cases where IPR infringement is found.  Serbia's Penal Code, adopted by Parliament in September 2005, has a specific chapter on criminal offences based on infringement of IP Laws; it provides adequate penalties, including stiffer penalties and prison sentences.  It also provides for ex officio prosecution without the filing of a private complaint by a rights holder.  The Penal Code enables the police to seize or destroy pirated goods and production equipment and materials.  However, in practice, courts have typically imposed only weak penalties.

The Law on Special Powers for the Efficient Protection of Intellectual Property Rights was adopted in June 2006 and makes legal entities, such as corporations, liable for IPR violations and provides for fines up to three million dinars (approximately $55,000). It also will provide ex officio authority for inspectors in areas such as trade, medicines and medical supplies, and electronic media and broadcasting, among others.

International Agreements

------------------------

The following conventions and agreements in the field of intellectual property are binding on Serbia as successor to international agreements with the former State Union of Serbia and Montenegro:

 - Convention Establishing of the World Intellectual Property Organization (1967) (member since October 1, 1973);

- Paris Convention for the Protection of Industrial Property (1883) (member since February 26, 1921);

 - Berne Convention for the Protection of Literary and Artistic Works (1886) (member since June 17, 1930); - Madrid Agreement Concerning the International Registration of Marks (1891) (member since February 26, 1921);

- Protocol relating to the Madrid Agreement Concerning the International Registration of Marks (member since February 19, 1997);

- Patent Cooperation Treaty (1970) (member since February 1, 1997);

- Hague Agreement Concerning the International Deposit of Industrial Designs (1925) (member since December 30, 1993);

- Universal Copyright Convention (1952) (member since 1966);

- Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks (1957) (member since August 30, 1966);

- Locarno Agreement Establishing an International Classification for Industrial Designs (1968) (member since October 16, 1973);

- European Patent Convention (1973) ratified by the FRY on August 29, 1996;

- Convention Relating to the Distribution of Program-Carrying Signals Transmitted by Satellite (1974) (member since August 25, 1979);

- Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure (1977) (member since February 25, 1994);

- Trademark Law Treaty (1994) (member since September 15, 1998);

- Lisbon Agreement for the Protection of Appellations of Origin and their International Registration (1958) (member since June 1, 1999);

- Madrid Agreement for the Repression of False or Deceptive Indications of Source on Goods (1891) (member since May 18, 2000);

- Nairobi Treaty on the Protection of the Olympic Symbol (1981) (member since March 18, 2000); 

- Treaty on Intellectual Property in Respect of Integrated Circuits (1989) (signed, not ratified);

- International Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations (member since December 20, 2002);

- Convention for the Protection of Producers of Phonograms Against Unauthorized Duplication of their Phonograms (member since December 20, 2002);

- WIPO Copyright Treaty (member since December 20, 2002);

- WIPO Performances and Phonograms Treaty (member since December 20, 2002);

WTO Accession

-------------

Serbia has been in the process of accession to the World Trade Organization since 2001. Both Serbia and Montenegro submitted separate applications for WTO accession in December, 2004, before Montenegro's vote to leave the State Union with Serbia.  At the February 15, 2005 meeting, the General Council accepted the separate membership applications and agreed to establish independent working parties to continue the accession process.  The first independent meetings of the countries' working parties were held in October, 2005.  Serbia's membership negotiations continue, with the government stating its goal to join the WTO by the end of 2008.

The USG, through USAID, has been providing technical assistance to Serbia on preparation for the WTO accession process.

 Following the signing of the Central European Free Trade Agreement (CEFTA) in Bucharest on December 19, 2006, the agreement was ratified in national parliaments during 2007 and came into effect in all signatory countries - Croatia, Macedonia, Serbia, Montenegro, Bosnia-Herzegovina, Albania, Moldova and UNMIK, representing Kosovo (Bulgaria and Romania left CEFTA upon joining the EU on January 1, 2007). 

CEFTA replaced the present complicated system of 32 bilateral free trade agreements between Southeast European countries; its aim is to facilitate trade and investment in the region with almost 30 million customers. Apart from strengthening economic ties, CEFTA contributes to the process of European integration.  CEFTA seeks to remove tariff barriers to regional trade in industrial and agricultural products by 2010.  The agreement envisages the liberalization of public procurement by May 1, 2010 and increased foreign investments in the region, while it also promotes the so-called “diagonal accumulation,” a principle that allows for preferential exports of goods jointly produced by several CEFTA countries to third markets.

 Serbia's total trade exchange with CEFTA countries was around $3 billion in 2007.  Other than with Croatia and Moldova, Serbia recorded a surplus with all CEFTA countries of $1.25 billion.  CEFTA countries account for 31.4% of Serbian exports and 8.1% of overall imports.

Transparency of Regulatory System                                            

  Commercial Code & Contract Law

------------------------------

The former Federal Law on Contracts and Torts (1978) embodies contract law in Serbia.  No laws have been passed in Serbia that replace or amend this law because experts view the law as essentially sound.  Still, some problems remain.  In contract disputes, the law provides judges with the discretion to reduce damages. This law, for instance, also addressed secured transactions; new secured transactions laws have been enacted to correct weaknesses in the 1978 law.  In May 2003, the Republic of Serbia adopted a new Law on Financial Leasing, thereby providing the framework for rapid development of leasing arrangements and contracts.  The law establishes a public register in the form of an integrated electronic database that documents leasing contracts.

The permitting processes that control both the acquisition of land (rights of use, in municipalities) in Serbia and subsequent decisions related to use of such land generally are considered a significant barrier to foreign investors.  Serbia's new Constitution, adopted in September 2006, permits private ownership of the construction land which will make foreign investment more attractive.  The level of bureaucracy varies from city to city.  

Bankruptcy Law

--------------

Serbia adopted a new bankruptcy law in July 2004, which came into force in February 2005.  The Law incorporates international standards; both the World Bank and USAID assisted in its preparation.  It provides enhanced creditor participation, improved debtor eligibility criteria to filter inappropriate petitions, an improved claim resolution procedure and penalties for submitting false documents and claims.  It also expands the role of private bankruptcy trustee-administrators.  The new law provides greater flexibility in developing a plan of reorganization but also requires adherence to strict deadlines and the consent of creditors for acceptance.  The new law also features international bankruptcy provisions, incorporating the UNCITRAL Model Law on Cross-border Insolvency. 

Implementation is culturally difficult, since bankruptcy in Serbia, as a former communist country, is perceived as a social failure that will lead to job losses.

 In 2007, BES organized a series of roundtables with key bankruptcy professionals that resulted in consensus on the need to "fine-tune" the Bankruptcy Law, based on two years' experience with the new law.  The outcome was a comprehensive list of concrete issues and suggestions for amendments.  The list was submitted in September 2007 to the Serbian Ministry of Economy as a basis for amending the law in 2008.

In 2005, two new agencies were created to foster implementation of the new bankruptcy law in Serbia: the Bankruptcy Unit within the Privatization Agency, which acts as the bankruptcy administrator for all majority state- or socially-owned companies in bankruptcy; and the Bankruptcy Licensing Agency, which should exercise regulatory power over bankruptcy administrators, including the conduct of professional examinations and the issuance of licenses to practice.  By the end of 2007, 372 bankruptcy trustees were licensed.  To date the Bankruptcy Licensing Agency has not performed its regulatory function and there was no meaningful supervision of bankruptcy administrators during 2005 and 2006.  At the end of 2007, when the Bankruptcy Licensing Agency changed management, with help of BES and other donors (EBRD, GTZ), the agency started drafting a regulation for supervision, monitoring, disciplinary measures and de-licensing.  This regulation is expected to be enacted in 2008.

In December 2007, about 813 bankruptcy cases were open, of which: (1) 367 were performed by bankruptcy trustees, and (2) 456 involved socially-owned companies, for which the trustee is the Bankruptcy Center of the Privatization Agency.

Alternative Dispute Resolution (ADR) - Mediation Law

-----------------------------------------------------------

A Law on Mediation was adopted February 24, 2005, entered into force on May 26, 2005 and introduced a new alternative dispute resolution mechanism into the Serbian legal system, implementation of which is expected to decrease the backlog of court cases.  Mediation is voluntary under the law and may be initiated before or during a proceeding before the court or other body.  The Center for Mediation was opened in Belgrade in August 2006.

Law on Competition/Anti-Monopoly Commission

-------------------------------------------

Serbia's Parliament approved a Competition Law in September 2005, which established the Commission for the Protection of Competition.  It became operational as an independent decision-making council in May 2006.  To date, the commission has been relatively inactive, mostly stemming from a lack of enforcement authority.

 The Law contains a pre-merger notification turnover threshold of alternatively 10 million Euros in Serbia or 100 million Euros worldwide.  Most foreign companies buying even a small company in Serbia will be forced to obtain approval from the Antitrust Commission prior to the purchase, which can take as long as four months.  The penalty provision, which permits low-level courts to impose severe penalties (up to 10% of total worldwide turnover) is a concern.  Amendments to the Competition Law that will address some of these issues are pending. 

  Energy Regulatory Agency

------------------------

On May 23, 2005 the Parliament of Serbia established an

Energy Regulatory Agency (ERA).  The Agency Council consists of a president and four members nominated by the Serbian Government and appointed by the Parliament.  The Council is accountable only to the Parliament for the Agency's work.  The Agency has authority over the electricity, gas, oil and central heating sectors.  Its main tasks are approval of pricing, development of a model for determining allowable business costs for energy sector entities, issuance of operating licenses and construction permits in the energy sector, and monitoring of public tenders.  The energy law prescribes that in those energy sectors where prices are affected by the monopoly positions of participants, business costs will be set at levels approved by the Agency.  In those areas deemed to function competitively, the market will determine prices.

In 2007, ERA issued more than 300 licenses granting energy entities the right to operate on the domestic energy market.  Some 758 license applications have been submitted to the Agency, most of which were for oil and oil derivates trading.  However, due to incomplete documentation, most of these applications have been returned to the energy entities concerned and additional documentation requested. 

On December 13, 2007, the Serbian Government approved the prices for access and use of the electricity transmission system proposed by the public enterprise for electric energy transmission and transmission system control "Elektromreza Srbije" (EMS).  This sets the basis for the electricity transmission system to be regulated separately.  The tariff system for access and use of the electricity transmission system entered into force on January 1, 2008 and enabled large eligible buyers to buy electricity on the market and separately pay for the transfer of electricity. 

The tariff system for electricity consumption for tariff buyers which would enable higher electricity prices has been delayed several times.  This tariff system should enter into force on April 1, 2008.

On November 1, 2007, representatives of the ERA and the Pennsylvania Public Utility Commission (PA PUC) signed a Memorandum of Understanding, under the auspices of USAID and the National Association of Regulatory Utility Commissioners (NARUC).  The goal of this partnership is the development of normative practices in regulatory affairs in the Serbian energy sector.  At their first meeting key issues discussed were price regulation in gas and electricity sectors, regional energy markets, quality of supply, restructuring of the energy sector and market monitoring.

Serbia is a member of the Southeastern European (SEE) Energy Market.

 Regulatory Agency for Telecommunications

----------------------------------------

The Regulatory Agency for Telecommunications (RATEL) was formed under the Serbian telecommunications law adopted in April 2003 and amended in April 2006.  Serbia’s Parliament elected the president and the members of the Agency's Management Board in May 2005.  RATEL’s mission is to raise the efficiency of existing providers, introduce new and improve old services to modernize telecom infrastructure, and create conditions for the sector’s further development.

The regulatory function of the Agency is to set rules for participants on the open market, with an emphasis on licensing.  Licenses gives individuals or legal entities the right to operate on the telecommunication market.  Other competencies of the Agency are interconnection or mutual connection of networks of the different operators; responsibility for overall network service, its maintenance and financing; and line leasing. 

In those telecommunications sectors where prices are affected by the monopoly positions of certain participants, the Agency has pricing authority. In those areas deemed to function competitively, the market determines prices.  The U.S. Government, through the Trade and Development Agency (TDA) funded program to assist RATEL in the development of a cost accounting system that would better allow the agency to monitor cost and state-set fees for telecommunications operators, including internet providers.  However, RATEL has not fully cooperated with the program and TDA is evaluating the future of the program.  

In addition to its regulatory function, the Agency has control and monitoring functions.  It is responsible for implementing relevant laws and may issue penalties.  RATEL has adopted more than 20 regulations setting rules related to license issuance and issued numerous licenses to the TV and radio stations, internet providers, cable-TV operators, mobile and landline operators, as well as certificates and technical examinations. 

In 2006, RATEL successfully conducted a tender procedure for issuing two licenses for second and third mobile phone operators.  This is just a start and more needs to be done in order open the telecommunication market.  Telekom Srbija, a state-owned cell phone and fixed telephony operator retains its fixed telephony monopoly although legally it lost that position in 2005.  Telkom has worked to postpone necessary liberalization of the market. 

Taxation

--------

The Ministry of Finance has implemented three phases of reform to modernize Serbia’s tax system in an attempt to simplify taxation and increase revenues.  The main components of the Serbian tax system are: Value Added Tax (VAT), personal income tax, corporate profit tax, excise duties, property taxes and payroll tax.  Serbia moved from a sales tax to a VAT system on January 1, 2005.

The standard VAT rate on most goods and services is 18%, with a limited list of foods, medicines and other products taxed at 8%. Humanitarian aid, grants, and orthopedic equipment for persons with disabilities are exempted from VAT, while traditional religious organizations are entitled to VAT refunds.

The applicable personal income tax rate is 12% as of January 1, 2007 for salaries and 10% for net income from self-employment.  Personal income tax rate for net income from agriculture and forestry is 14%.  Other personal income is primarily taxed at a rate of 20%, although deductions are allowed for some types of income.  Serbian residents are subject to an additional tax at the rate of 10-15% if their annual income exceeds three times the average annual salary in Serbia.   The non-taxable limit for 2007 stands at SRD 1.39 million or $25,000.  Employees must pay this tax.

 Excise taxes are levied on “luxury” goods and other products such as oil derivatives, beverages (alcohol, soft drinks), cigarettes, coffee, salt and ethanol alcohol.  Excise taxes, which are assessed in addition to VAT, are flat rates based on product volume.  In July 2003, Parliament amended the excise tax law to bring Serbia in line with EU and WTO requirements after a transition.  As of January 1, 2008, excise taxes on both imported and domestically produced cigarettes were equalized.

For business taxpayers, the property tax rate on real estate is up to 0.4%, while for persons rates are progressive depending on the value of taxable base, the highest one being 3% of the market value of property.  A 2.5% tax rate is applied to the transfer of ownership rights of real estate and other taxable property.  A rate of 0.3% is imposed on the transfer of securities and shares in legal entities.  Inheritance and gift tax is paid at a progressive rate of up to 2.5% of the taxable base.  In addition to the property tax, there is a Tax on Use, Possession and Carrying of certain goods i.e.:  motor vehicles mobile phones, boats, airplanes and weapons.  Profit tax is not withheld on dividend payments between Serbian entities.

For non-residents, tax is withheld as follows:

 - Income tax is calculated and withheld on salaries at the rate of 12% and on certain other income (dividends, royalties, interest, capital gains, lease payments) at the rate of 20%.

- The provisions of applicable double tax treaties regarding withholding will apply.  However, there is no treaty on double taxation between the United States and Serbia.

Efficient Capital Markets and Portfolio Investment                   

 Banking Sector

--------------

The banking sector comprises 90% of the total assets of the financial sector in Serbia.  By the end of September 2007, consolidation had reduced the sector to 36 banks with total assets of $25.4 billion (about 55% of GDP), with a 77% share held by foreign banks.

 The private sector has access to a variety of credit instruments.  In the first nine months of 2007 credit volume increased by 29%, compared to the end of 2006, and reached $12.5 billion despite a restrictive monetary policy throughout 2007.  In September 2007 non-performing loans were 5% of total corporate credits and only 1.7% of total retail credits.

A new banking law was adopted in 2005 and came into force in October 2006.  It requires that a buyer of more than 5% of a bank’s capital seek approval from the National Bank of Serbia (the central bank) and sets the minimum  initial capital for a bank at EUR 10 million. The Central Bank announced in 2006 that, because banking sector restructuring was almost complete, it would start issuing greenfield licenses again, but as of January 2008 no new licenses had been issued.  An application is now pending for a greenfield license.  The new law stipulates that accountability for bank management no longer rests in a single general manager but rather with a two-member executive board.  It also introduces more responsibilities for auditors and requires that each bank establish a risk management unit.

Capital Markets

---------------

Serbia has successfully established a capital markets infrastructure, but the equity and bond markets have yet to become a source of long-term capital for enterprises.

Securities are traded at the Belgrade Stock Exchange (BSE). In 1989, the Yugoslav Capital Market was formed in accordance with the Capital and Money Market Law and was renamed the Belgrade Stock Exchange (BSE) in 1992.  In November 2007,  BSE market capitalization was $25.7 billion (89% in company shares and 11% in bonds of the Republic of Serbia), more than double the December 2006 capitalization.  Out of 1,700 companies listed by requirement on the "free market," only shares of about 300 companies trade regularly (more than once a week).  Shares of approximately 500 companies have never been traded.  The 15 most liquid companies accounted for 42% of total share turnover in 2007. 

Total turnover at the stock exchange in the period January-mid December 2007 reached $2.8 billion or 55% more than in 2006, while number of transactions was doubled in the same period.  In 2007, the index of the 15 most liquid shares recorded growth of 31.5% while the broad stock index of almost all shares traded grew 39%.

All registration of securities and clearing of trades is handled by the Central Securities Depository and Clearing House, a joint-stock company organized in 2003.

The Securities Commission (SC), established in 1995, is the regulator for securities market.  Investment funds are supervised by the SC in accordance with the Investment Funds Law that came into force in January 2006.  The first investment funds were established in Serbia during 2007 and by January 2008 there were eight registered investment funds.  On September 30, 2007 total assets of all registered investment funds reached $77 million. 

The main problems of Serbia's capital markets include:

(1) the unwillingness of companies to disclose financial results, which explains why most shares are not officially listed but trade at on the OTC market at the BSE;

(2) no major state-owned companies, such as energy or telecom enterprises, are publicly traded;

(3) a general lack of awareness among companies about possibilities for raising capital in the financial markets; and

(4) unfavorable tax treatment of securities trading.

Leasing, Insurance Sectors and Private Pension Funds

----------------------------------------------------

Development of the insurance sector, investment funds and private pension funds should help the development of portfolio financing and long-term debt market.  The National Bank of Serbia supervises leasing companies, insurance companies and private pension funds. 

The insurance sector is dominated by two insurers, each of them controlling around 30% of the market.  One of them remains state owned, while the other was privatized in November 2007.  After initially strong investor interest, the second largest insurance company was sold to a sole bidder - Italian insurance company Fondiaria SAI for $308 million. 

Of the 20 total insurance companies operating in Serbia, 12 are foreign.  At the end of September 2007, the total assets of the insurance sector were $1.3 billion, or 32% greater than at the same period last year. Insurance premiums at the end of third quarter of 2007 were $618 million (about 1.4 percent of GDP), up by 16% over the same period last year.

The law on private pension funds was adopted in July 2006; the National Bank of Serbia had licensed seven companies (five foreign and two local) by the middle of 2007.  The National Bank of Serbia amended its regulations in July 2007 and allowed pension funds to invest up to 40% of their assets into listed companies on Belgrade Stock Exchange (currently there are three listed companies) in order to promote investments into listed shares.  Total assets of private pension funds reached $46.6 million at the end of September 2007.

The law on leasing companies was amended in 2005.  At the end of September 2007, there were 17 leasing companies in Serbia (of which 10 were foreign-owned) with total assets of $1.6 billion.  The assets grew by 31% compared to December 31, 2006.  Almost 90% of all lease financing was for commercial purposes while only 10% was for retail financing.  The bulk of financial leasing assets - 82% - were financed by foreign borrowing.  The Agency for Registration of Business Entities keeps a record of all leasing contracts.

Political Violence                                                                             

Since October 2000, Serbia has been led by democratically-elected governments that are implementing new policies contributing to stabilization of the region.  Following Montenegro's successful independence referendum in May 2006, the Republic of Serbia's democratic leadership has continued a democratic, pro-reform orientation. 

The assassination of Serbia’s prime minister in the spring of 2003 by a criminal group was a major setback.  The government reacted responsibly by launching a crackdown on organized crime, resulting in the solving of political murders perpetrated previously by the former Milosevic regime; by disbanding a Milosevic-era paramilitary group; and by removing corrupt judges, prosecutors and other officials.

Serbia continues to work within the international framework on Kosovo’s future status.  

There is continuing localized violence between competing political parties in the Sandzak region of Serbia.  This violence is usually directed at opposing party figures and does not target unrelated civilians or businesses.

There is growing anti-American sentiment among the general public, some residual from the NATO intervention against then-Yugoslavia (Serbia and Montenegro) in 1999, which included the bombing of Belgrade; but now even more a result of the impending conclusion of Kosovo status.  Bilateral relations had normalized since the ouster of Milosevic, and Serbia and the United States continue to share many policy goals and cooperate productively in many areas.  There had been broad support for a strengthening of ties with the United States, especially in commercial relations.  However, a pervasive skepticism persists among the general population over U.S. foreign policy in Serbia especially with regard to Kosovo.  There have been no reported incidents involving politically-motivated damage to American projects and/or installations in Serbia.  

Corruption                                                                                        

Corruption is a problem in Serbia.  It ranges from the petty expectation that bribes are to be paid during business transactions to money laundering and attempts to siphon-off assets by politically-connected “tycoons” and organized crime groups.  The imposition of international sanctions from the early 1990s until 2001 had the effect of stimulating illicit trade and smuggling.  The Milosevic regime effectively facilitated and exploited this illegal economic activity. 

There is now increased acknowledgement of corruption.  Increased independence and assertiveness of the media since the ouster of Milosevic have heightened scrutiny over the transparency of government and business dealings as well as public pressure to combat corrupt practices.  In early 2003, the assassination of the Serbian Prime Minister galvanized the new government to crack down on organized crime and begin a more thorough “house-cleaning” of the judiciary, security services, military, etc.  Nonetheless, continued strengthening of insitutions and legal mechanisms to combat corruption is required.  Additionally, the deeply rooted practice of favoring certain parties based on "veze," or connections, in lieu of more transparent practices remains.

In the 2007 Corruption Perception Index survey compiled by Transparency International (TI), an international anti-corruption watchdog organization, Serbia received an index score of 3.4 out of 10 (10 being "highly clean"), a slight improvement from the rating of 3.0 in 2006.  This is in comparable to neighboring countries' scores (Croatia, 4.1; Bulgaria 4.1; Romania, 3.7; Bosnia and Herzegovina, 3.3; Macedonia, 3.3; Montenegro 3.3; Albania, 2.9).

The Serbian Government faces the challenge of rehabilitating business practices and legitimizing the “informal” economy through creation of a transparent legal and regulatory framework.  Since 2002, Serbia has been an active participant in the Stability Pact Anti-Corruption Initiative, adopting guidelines recommended within the Pact.  Additionally, the government joined other regional finance ministers in an initiative to combat cross-border cigarette smuggling.

Serbia is a signatory to the Council of Europe Civil Law Convention on Corruption and has ratified the Council's Criminal Law Convention on Corruption, the United Nations Convention Against Transnational Organized Crime and the United Nations Convention Against Corruption.  It is also a member of GRECO (the Group of States against Corruption), a peer monitoring organization that allows members to assess anti-corruption efforts on a continuing basis. 

In Serbia, both giving and receiving bribes are crimes which carry prison sentences up to 5 and 12 years, respectively.  Bribes by local companies to foreign officials are also criminal acts punishable by law.

There was continued government activity on corruption in 2007.  The Special Prosecutor' Office for organized crime was responsible for a total of 125 arrests, 111 detentions, 266 individuals under investigation in connection with organized criminal activities and 186 ongoing investigations.  Indictments against 80 individuals have been raised and 61 persons have been convicted in the first instance and for 49 convictions have been affirmed on appeal.  This compares to 206 arrests and 356 investigations in 2006 and to 89 arrests and 96 investigations in 2005. The office indicted 36 members of the "bankruptcy mafia" for causing state losses of around EUR 50 million.  Former Commercial Court President Goran Kljajevic was among the indictees.  It also initiated proceedings against 53 members of the "Highway Mafia," a toll road racket that caused EUR 6.5 million in losses. Police arrested 20 members of the "Customs Mafia," 11 customs officers and nine business owners who are suspected of defrauding the state of several million euros by giving and receiving bribes, abusing office and smuggling by using falsified documentation to identify goods as in transit.

 In February 2007, Serbian police arrested 18 people, including 12 university teachers, of the "Education Mafia" in an ongoing investigation of corruption at the Law Faculty of Kragujevac University.  The suspects were charged with taking bribes over a long period of time in exchange for issuing passing grades to law students who did not sit for exams.  In October 2007, police arrested five former Genex (one of the biggest companies in the former Yugoslvia) executives, and a former Privatization Agency official.  The group is suspected of conspiring to sell Genex land holdings without public tenders and abusing their positions.  Two months after the so-called "Genex Mafia" was arrested, Serbian police busted another organized crime ring.  In November 2007, a joint effort between the Organized Crime Prosecutor's Office and the police arrested32 people for allegedly defrauding the government and laundering almost $29 million.  This group was accused of tax evasion, fraud, money laundering, abuse of office and abuse of the privatization process.  

Bilateral Investment Agreements                                                 

Serbia and Montenegro concluded 41 investment protection treaties/agreements with the following countries:  Albania, Austria, Belarus, Belgium and Luxemburg, Bosnia and Herzegovina, Bulgaria, Russia, China, Cyprus, Croatia, Cuba, Czech Republic, Egypt, Finland, FYR Macedonia, France, Germany, Ghana, Greece, Guinea, Hungary, Holland, India, Iran, Israel, Italy, Kuwait, Libya, Lithuania, Morocco, Nigeria, Poland, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, UK, Ukraine, Zimbabwe.  These agreements remain in force as Serbia is recognized as the successor to the State Union.  The Serbian Ministry of Economy and Regional Development assumed responsibility for negotiating changes to these agreements  In October 2007, the Serbian Government approved the next text of a model Bilateral Investment Treaty (BIT) for future agreements.  

The United States does not have a Bilateral Investment Treaty (BIT) with Serbia.  Given the presence of U.S. investors, Serbia should be a BIT candidate. 

In 2000, the European Commission introduced Autonomous Trade Measures for Serbia.  These measures permit exports to the EU without customs and quantity restrictions for almost all products of Serbian origin.  Trade with Kosovo, which is under UN administration, proceeds duty free, although goods are assessed relevant taxes.

Since 2000, the trade regime has been simplified by substantially reducing and simplifying licenses, quotas, tariff rates and structure.  Tariffs comply with EU tariff nomenclature.  There are no tariffs for most products imported from countries in the region. On November 7, 2007, Serbia initialed a Stabilisation and Association Agreement with the EU as an additional step toward European integration.   

OPIC and Other Investment Insurance Programs                      

Serbia and Montenegro signed a Bilateral Agreement with the U.S. Overseas Private Investment Corporation (OPIC) in July 2001 and became eligible for OPIC programs in November 2001 with ratification of the Agreement. OPIC products include: (1) insurance for investors against political risk, expropriation, damages due to political violence and currency convertibility; (2) insurance for certain contracting, exporting, licensing and leasing transactions.

In 2005, OPIC supported a $90 million regional equity investment fund for Southeastern Europe managed by Bedminster Capital Management, and it provided $30 million in term financing to ProCredit Holding to expand microfinance lending in Serbia and 18 other countries.  In April 2006, Bedminster Capital Management finalized a new investment initiative, raising $200 million for investments in Southeast Europe, including Serbia.  In March 2007, Bedminster Capital Management raised $320 million for the South East Europe Equity Fund II.  OPIC and EBRD each have 40% of the capital in the new fund.  The focus is still on South East Europe including the republics of the former Yugoslavia, Romania, Bulgaria, Albania and Turkey.  For more information see: http://www.opic.gov.

Serbia became a member of the Multilateral Investment Guarantee Agency (MIGA) -- a World Bank affiliate – in April 2002. MIGA also provides political risk insurance for investors.

 Labor                                                                                                   

Serbia’s total labor force, according to the ILO Labor force Survey methodology, is comprised of approximately 3.45 million people, of which around 720,000 are unemployed, for an unemployment rate of 20.8%. (The official unemployment rate is about 28%, but this measure also includes workers from the gray economy).

Approximately 60% of workers are employed in the private sector, while 40% are employed by the government, state-owned and socially-owned companies. (Socially-owned means much of the voting interest is held by workers.)  Major sectors by employment include: processing industry (29%), trade (10%), health and social work (8%), education (8%), transport/ communications (6%), construction (5%), and agriculture, forestry and water industry (4%).

While illiteracy is low (6%), a population survey from 2002 shows that 16% of the population did not finish primary school, 24% of the population completed primary school; 41% completed secondary school; 4% completed two-year colleges and 6.5% have a university education.

The main characteristics of the Serbian labor market are: (1) high unemployment;

(2) significant hidden unemployment;

(3) considerable employment in the informal sector;

(4) an inflexible formal labor market, and

(5) huge regional disparities.

Labor costs are relatively low in Serbia.  The minimum wage for the period July-December 2007 was set by the Social Economic Council at approximately $205 (11,094 dinars) per month.  According to figures released in January 2008, the average take-home salary in November 2007 was approximately $524 (29,373 dinars) or $26 (1,468 dinars) per day or $3 (183.5 dinars) per hour.  The take-home salary in November 2007 was about 15% higher in real terms than the average salary in November 2006.  Two average salaries are needed for ordinary monthly consumer basket. 

Gross salaries also include personal income tax, pension fund levies and other contributions.  Payment is the responsibility of the employer.  The contribution for pension and disability insurance is 22% (11% paid by the employer and 11% by the employee); for health insurance, 6.15% (3.075% paid by the employer and 3.075% by the employee), and for unemployment insurance, 1.5% (0.75% paid by the employer and 0.75% by the employee).  As of January 2007, personal income tax was reduced from 14 to 12%; however, the revised tax law also introduced a threshold of 5,000 dinar ($83), below which there is neither withholding of income tax nor required social contributions.  The overall impact of these changes, which were designed to lower labor costs to employers, brought the total tax and contribution rate from 73 cents per dollar of net wage to 62 cents.

The first reform of Serbia’s Law on Labor Relations (passed in December 2001) was a step forward in regulating the labor market based on market principles.  However, a new version adopted in March 2005 and amended in July 2005 was viewed by many in the foreign investment community as a step back towards labor market inflexibility.  Foreign investors believe that this law increases labor costs, and that many of its provisions create an unnecessary burden on the employer.  For example, the new law doubles severance for redundant workers and requires that employers pay expenses associated with trade union offices in workplaces.

Foreign-Trade Zones/Free Ports                                                  

According to the Law on Free Zones adopted on July 14, 2006, four trade zones in Novi Sad, Pirot, Zrenjanin and Subotica have government approval to operate as free trade zones.

The law permits a free trade zone only if 30% of the goods produced or services supplied annually in the zone are intended for export.  Furthermore, the government may cancel a zone's license if the value of goods and services exported from the zone is less than 50% of the total value of production (goods and services) in the zone in three consecutive years.  The law allows up to 100% foreign ownership of the managing company of the free trade zone.  The law meets the rules of the World Trade Orgnization and the EU, which do not permit direct export subsidies.  Companies working in the free trade zone do not have customs or tax incentives for export but have customs and tax incentives for work within the zone.  Goods intended for processing in the zone are exempt from customs duty and other import duties. 

A law on industrial parks has been drafted and it is expected to be adopted in the first half of 2008.  The law envisages that the government will finance up to 50% of the infrastructure in the parks including roads, water and gas supply, sewerage, electricity, telecommunications, etc.  

Foreign Direct Investment Statistics                                            

Cumulative foreign direct investment (FDI) for the period 2000 to September 2006 is approximately $9 billion, of which some $4.5 billion was invested in 2006 and more than $2.5 billion in 2007

The two biggest investment deals in 2007 were the concession agreement for constrution of the 148-kilometer long Horgos-Pozega higway with Spanish-Austrian consortium "FCC Construccion - Alpine Mayreder" worth $1.3 billion and an MOU on IT park construction signed with the Indian firm Embassy Group with a minimum of $600 million  in investment. 

Significant investments in 2007 came from the sale of bankrupt department store chain "Robne Kuce Beograd" to Verano Motors with support from foreign capital for $520 million; the sale of DDOR insurance company to Italian Fondiaria for $377 million; the sale of the Belgrade based A Bank to Belgian finacial group KBC for $140 million; the opening of the Grand Casino, the first casino in Belgrade, by Austrian and Greek partners worth $86 million; and the sale of the bankrupt textile company Beko to Greek textile company Lamda for almost $80 million. 

 As before, the main source of FDI in 2007 was privatization.  However, greenfield investments counted for 30-40% of the total FDI in 2007 and their share is increasing.

 According to SIEPA, the leading investor country in Serbia in 2007 was Austria with almost $700 million, followed by Luxembourg with $242 million; Montenegro with $158 million; then Greece, Cyprus, Italy, Switzerland, France, Germany and the United States. 

Following are some major FDI transactions in Serbia:

Company: Telenor 

Country: Norway 

Investment: $1.92 billion for 100 percent of mobile company Mobi63 ($1.4 billion to the Serbian government and $520 million to the Austrian co-owner)

 

Company: Philip Morris International
Country: USA
Investment: $700 million for 70 percent of Nis Tobacco Factory

Company: Stada

Country: Germany

Investment: $595 million for 98 percent of pharmaceutical manufacturer Hemofarm

 

Company: National Bank of Greece

Country: Greece

Investment: $576 million for 99 percent of Vojvodjanska Bank - Retail and Corporate Banking

 

Company: Verano Motors

Country: Serbia

Investment: $520 million for bankrupt department store chain "Robne Kuce Beograd"

 

Company: Bank Intesa 

Country: Italy 

Investment: $399.6 million for 90 percent of Delta Banka - Retail Banking

 

Company: Fondiaria

Country: Italy 

Investment: $377 million for 100 percent DDOR insurance company

 

Company: U.S. Steel
Country: USD

Investment: $200 million for bankrupt steel-producer Sartid

 

Company: Alpha Bank

Country: Greece

Investment: $185 million for 88.64 percent of Jubanka - Retail Banking

 

Company: KBC Gpoup

Country: Belgium

Investment: $140 million for 100 percent of Belgrade A Bank - Retail Banking

 

Company: Ball Corporation
Country: USA
Investment: $100 million greenfield investment – beverage packaging

 

Company: Credit Agricole 

Country: France

Investment: $96 million for 71 percent of Meridian Banka - Retail Banking

 

Company: Erste Bank 

Country: Austria

Investment: $87.84 million for 83.3 percent of Novosadska Banka - Retail Banking

 

Company: METRO Cash & Carry

Country: Germany

Investment: $72 million - Gross and Retail Trade