As international companies grow their footprint and tap into new markets, understanding local hiring laws and employment structures becomes vital to building sustainable operations. In this 17-part series, we guide foreign businesses through the legal and strategic aspects of employment in key global jurisdictions.
This installment brings us to Serbia – a strategically located country in Southeast Europe with a growing economy, competitive labor costs, and an increasingly investmentfriendly climate. While direct employment is the primary model used by foreign companies, Serbia also allows for alternatives such as independent contracting, outsourcing, and engagement through local service providers. Serbian labor laws emphasize employee rights and formal compliance, making it essential for employers to choose the appropriate structure to manage risk, control costs, and maintain a legally sound operation.
Authored by Miloš Dosen
Aliant+ Accounting Firm in Serbia
In Serbia, besides the classic employment relationship based on an employment contract, there are also alternative models of workforce engagement that provide flexibility for both employers and engaged individuals. These models can be financially more favorable, administratively simpler, or better suited to specific business needs. However, it is crucial to understand their accounting and legal implications to use them successfully and lawfully, avoid risks, and optimize costs.
The main parameters to consider when choosing an alternative form of employment include whether the full income tax rate (10%) applies, as well as whether the three existing contributions in Serbia apply – pension and disability insurance (24%), health insurance (10.3%), and unemployment insurance (0.75%). Additionally, it is important to determine whether the engaged individual is already employed elsewhere or unemployed.
Alternative forms of employment can lead to significant savings in terms of tax and contribution payments. The main benchmark is the total tax cost of an employment contract, which amounts to 45% of the agreed gross amount. Anything below this is more favorable.
The main alternative forms of employment in Serbia are:
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Contract for Work (Ugovor o delu)
Legal Aspects:
A contract for work is concluded for a specific task with a clearly defined result, rather than for continuous work engagement. It is regulated by the Law on Obligations, not the Labor Law. This contract is not suitable for jobs that exhibit characteristics of an employment relationship, as it can lead to legal and tax consequences. However, it is highly favorable for project-based and temporary engagements in fields such as market research, project management, professional services etc.
Accounting Aspects:
If the individual is unemployed, payments under a contract for work are subject to withholding tax (20%), pension and disability insurance (24%), and health insurance (10.3%). Additionally, 20% of the gross contract value is excluded from taxation (normative costs). This reduction is the primary tax-saving advantage of this contract.
It is also possible to engage an individual who is already employed elsewhere, in which case the cost of health insurance contributions (10.3%) is not paid. This allows for significantly more cost-effective engagement of various experts, at a much lower expense than hiring them as full-time employees. Payments are recorded as service costs. Another advantage is that this contract allows for compensation payments below the minimum wage in Serbia (circa 490 euro).
Savings:
- Unemployed individual – 20% of the gross contract value is excluded from taxation.
- Employed individual – 20% of the gross contract value is excluded from taxation plus exemption from health insurance contribution (10.3%).
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Copyright Contract (Autorski ugovor)
Legal Aspects:
This contract is used for jobs of an intellectual and creative nature, such as writing, design, photography, etc. It is regulated by the Law on Copyright and Related Rights, not the Labor Law. Copyrighted works must have originality and intellectual value for the contract to be valid.
Accounting Aspects:
Taxation is more favorable than with a contract for work – the tax base is reduced by normative costs (ranging from 34% to 50% for most copyrighted works). The tax rate is 20% on the remaining amount (withholding tax), while contributions are calculated depending on whether the engaged person is insured elsewhere. These costs are recorded as intellectual service expenses.
Savings:
- Unemployed individual – 34-50% of the gross contract value is excluded from taxation.
- Employed individual – 34-50% of the gross contract value is excluded from taxation, plus exemption from health insurance contribution (10.3%).
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Engaging Sole proprietors (Preduzetnici – direct translation Entrepreneurs)
Legal Aspects:
Many workers choose to register as sole proprietors (entrepreneurs) and provide services as legal entities. This allows for greater flexibility and reduced costs for the employer. However, there is a risk of disguised employment if the individual works exclusively for one client.
This form of engagement was very common until 2019 when the government introduced the Independence Test – a control checklist used to determine whether an entrepreneur is genuinely independent or not. The Tax Administration assesses the entrepreneur’s independence, but the subject to scrutiny is actually the principal, if the principal is a domestic company. If the entrepreneur is engaged by foreign partners/principals, then the entrepreneur themselves is the subject of the audit.
Practice has shown that these relationships are rarely monitored. If an entrepreneur fails the Independence Test, the principal must retroactively calculate and pay full taxes and contributions, which is over 30-40% more expensive, along with additional penalties. Until 2019, this was the standard operating procedure in IT and service industries, but it is still widely used today. Practice has shown that the test can be completely circumvented by carefully crafting of service agreements.
For foreign partners, this remains the recommended model for engaging associates and entering the Serbian market. This type of engagement is primarily used in IT, professional services, administrative services, design and creative industries, HR/recruitment, and almost all other service-based industries.
Accounting Aspects:
Out of three existing sole proprietor’s (entrepreneurs) tax regimes, the main one is a flat-rate taxation system called ‘pausalac’ (this is completely untranslatable). This is the most favorable option, and the entrepreneurs pay fixed monthly obligations, which are between €300 and €500 per month (taxes and contributions/insurance included). The main limitation is the revenue cap of 6 million RSDinars (circa €51,500) per year.
If a foreign partner engages a professional (entrepreneur) this way, they have a clean, tax-deductible expense, and the total tax burden is only 8-15% of the gross amount and is an obligation of the entrepreneur. This is the primary alternative employment method in Serbia, and anyone planning to do business here must become familiar with it.
Estimated Tax Savings:
- Employment contract tax & contributions → 45% of the gross amount
- Engaging an independent entrepreneur → 8-15% of the gross amount
- Total savings → 30-37% lower tax burden
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Employment through Youth Cooperatives
Legal Aspects:
Employers can engage workers through employment agencies and youth cooperatives, thereby avoiding direct employment while still complying with labor laws and respecting workers’ rights. Agencies handle administrative and tax obligations and issue invoices to the employer based on the number of hours worked.
This model is commonly used in the hospitality industry. If young people are engaged through a youth cooperative, the total tax cost is 24% of the agreed net salary.
This model is only viable, if the prospects are students, which they need to prove.
Is it necessary to set up a local entity to hire an employee in Serbia?
The main consideration regarding this question relates to the entrepreneur engagement model, previously explained. This is the starting point since it allows for establishing a functional business presence in Serbia without setting up a local company.
However, foreign legal entities can directly employ workers in Serbia by establishing a representative office. A representative office does not have a full legal personality, is not required to submit financial reports, and does not operate as an independent legal entity. It only serves as a vehicle for paying employee salaries.
Representative offices have the right to pay salaries and operational expenses incurred in Serbia (such as rent and supplier costs). These funds are transferred from the parent company to a special account. However, opening these non-resident corporate bank accounts in Serbia is complex matter.
Representative offices can hire or engage associates through all the previously described models.
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