CMS Expert Guide to cash pooling in Serbia

a) Intro

In Serbia, there is no specific legislation on cash pooling. Cash pooling arrangements should therefore comply with general corporate and banking regulations. Cash pooling is also not a widely used financing method in Serbia. There are only a limited number of Serbian banks offering notional cash pooling arrangements. The restrictions that apply to cash pooling refer to cross-border cash pooling. Serbian entities are generally allowed to have bank accounts with banks registered in Serbia but opening an account with a foreign bank (meaning a bank with its seat outside Serbia) is subject to prior approval from the National Bank of Serbia (NBS), which can be granted only for a limited number of cases listed under the NBS bylaws. In addition, foreign exchange regulations impose limits both in terms of granting and receiving loans from abroad, allowing Serbian entities to grant a loan to a foreign entity only if the loan is granted from the profits of the Serbian entity that have been realized abroad and if the foreign borrower is a majority-owned subsidiary of the Serbian entity. Therefore, cash pooling that would include entities with seats both inside and outside Serbia, or a foreign bank, may not be feasible.

b) Social interest and due diligence

Directors have a duty to perform their role with due care and diligence, and in line with the provisions of Company Law and/or the company’s internal acts. Failure to do so may make directors liable for damages thus caused.
In the context of cash pools, due care and diligence may require that the director ensures his/her company is able to seek repayment of the funds contributed and/or is able to benefit from partaking in the arrangement through, for example, preferential interest rates or easy access to liquid finance.

c) Shareholder’s loan provisions

Shareholders of the company who (solely or acting in concert with third parties) hold a minimum of 25% of voting shares, as well as shareholders who have control over the company, the supervisory board, the managing board and any persons engaged in the management or representation of the company, procurators, liquidation managers, owe a general duty of care and loyalty to the company and are subject to corresponding liability for breach of these duties. Shareholders and directors are primarily required to perform their duties in good faith, with the care of a prudent businessman, and in a reasonable belief that they are acting in the company’s best interests. Failure to comply with these duties can lead to personal liability to the company. 

Under the Serbian foreign exchange regulations, cross-border loans need to be reported/registered with the National Bank of Serbia within 10 days as of signing of the loan agreement. Even though the reporting or registration should be mere formality, the National Bank of Serbia widely interprets the foreign exchange rules and has discretionary right to refuse to register the loan agreement if its clauses are deemed incompliant with the foreign exchange rules. 

Further, under the Serbian Companies Act the Company is prohibited from processing payments to the shareholders if, according to the annual financial statements, net worth of the Company is below, or would due to such payments, become lower than the disbursed capital increased by the reserves that the company is obliged to maintain in accordance with the law or statute, if such reserves exist, except in the case of reduction of basic capital. The total amount of payments to shareholders for the business year cannot be greater than the profit at the end of that business year, increased by the undistributed profit from previous periods and the amounts of reserves foreseen for distribution to shareholders, and minus the uncovered losses from previous periods and the amounts of reserves that the company is obliged to maintain in accordance with the law or statute, if such reserves exist. The company may always make payments to its shareholder who is a natural person under the employment contract. It is further regulated that, shareholders who made the payment contrary to previously discussed restrictions and regulations are obliged to return the same amount to the company, if they knew or had to know that the payment has been made contrary to the imposed restrictions. 

d) Liquidity protection

Directors have a duty to act with due care and diligence in order to keep the company solvent. In the context of cash pooling, this may mean the directors of the parent company ought not to draw on a subsidiary’s cash if to do so would put the subsidiary in a state of insolvency. Similarly, directors ought to have regard to the consequences that joining a cash pool would have on their company’s solvency. 

Directors owe their duties first and foremost to the company. They are to put their company’s success and interests above those of the group.

Hidden distribution of profits

There are three types of hidden profit distribution. Namely:

• Provision of services or goods to shareholders or to their related parties at terms below the market ones;
• Application of lower interest rate than the market rate upon the provision of loans to the above persons;
• Purchases from the above persons at terms which exceed market ones.

Hidden profit distributions make up part of the annual corporate income tax (CIT).

e) Insolvency proceedings – contestation of transactions

Any type of a disposal can be challenged if, at the time of a disposal, debtor had knowledge or was obligated to know that the disposal is creating damage to the creditors and if a third party whom with or to whom the legal action has been taken had similar knowledge or was obligated to know about the negative consequences of such legal action. According to law, if a third party mentioned above has connections to the debtor, it will be presumed that such third party was informed and had knowledge that the debtor’s actions are creating damage to the creditors. On the other hand, when it comes to the disposals without compensation and other legal actions equated to such disposals, it is considered that the debtor had knowledge that such disposals are creating damage to the creditors and for refuting such legal actions, the knowledge or presumed knowledge of a third party is not relevant. The Law on Obligations further specifies that inheritance waiver is to be considered as a disposal without compensation. 

In certain occasions refutation is not possible. Debtor’s legal actions could not be refuted if they are considered as the usual appropriate gifts, reward gifts, as well as gifts made from gratitude, proportionate to the material possibilities of the debtor. 
The process of refutation can be performed by a lawsuit or objection. 

If the court adopts the filed lawsuit, legal action which is being refuted by the lawsuit is going to be released of all of the legal consequences and is not going to produce any legal effects, but only towards the prosecutor and to the extent of the settlement of creditor. 

a) Intro

As a general rule, the company’s directors and shareholders should ensure that the company does not become insolvent or fail to maintain the minimum capital requirements by reason of the cash pool arrangement. 
In addition, the shareholders and directors should be aware of the following:

b) Liability of directors

Criminal liability

The law imposes criminal liability on a director who causes the insolvency of a company or causes damage to the company as a result of his failure to comply with relevant laws, constitutional documents (of the company) and obvious negligence in discharging his duties. Thus, any intra-group borrowing must not prejudice the interests of minority shareholders and creditors – if it does, the director risks criminal liability. To prevent this, the borrowing must be concluded on an arm’s length basis (i.e. subject to standard market conditions) without causing any insolvency issues to the cash pooling participant.

Civil liability

Under the Serbian Companies Act, both the company’s shareholders, members of the supervisory board and / or directors may be liable to the company / minority shareholders for damage the company suffers as a result of a breach of corporate legislation. It is therefore important that directors implement cash pooling arrangements with due adherence to the minimum capital requirements and relevant corporate approvals.

c) Liability of shareholders

Piercing of the corporate veil

The Serbian Companies Act provides for liability of the company’s shareholders if they abuse the company. The company is deemed to have been abused especially if the shareholder: 

1. uses the company to achieve a goal which is prohibited; 
2. uses or disposes of the company’s assets as if they were his / her personal assets; 
3. uses the company or its assets in order to cause damage to the company’s creditors;
4. to reduce the company’s assets procures personal gain or gain for third parties although the person has been aware or must have been aware that the company would not be able to fulfil its obligations. In such an instance, the company’s shareholders share a joint, several and unlimited liability for the unsatisfied debts of the company. 

The Creditor of the Company can file a lawsuit in the timeframe of six months starting with the moment of collecting awareness about the abuse, but not later than five years from the actual occurrence of the abuse.

Civil liability

Both the company’s shareholders, members of the supervisory board and / or directors may be liable to the company / minority shareholders for damage the company suffers as a result of a breach of corporate legislation. It is therefore important that directors implement cash pooling arrangements with due adherence to the minimum capital requirements and relevant corporate approvals.

a) Intro 

Apart from the obligations and liabilities imposed on directors and shareholders with the purpose of reducing liability risks, law imposes a structure whose primary goal is to further reduce liability risks. One of the possible ways of securing the risk are a facility agreement and warrant provided by the bank. When it comes to the cash pooling agreement, as previously stated, there are no specific provisions in law, since the cash polling agreements are not frequent in Serbian law. Still, there are certain restrictions imposed by the corporate law and banking regulations. 

b) Corporate power

Shareholders and directors are primarily required to perform their duties in good faith, with the care of a prudent businessman, and in a reasonable belief that they are acting in the company’s best interests.  The primary obligation is to prevent the company from becoming insolvent, therefore, the concern of the shareholders and directors is that an inherent risk in cash pooling is the insolvency of one participant threatening the solvency of all other participants. In addition, certain transactions undertaken by a company up to five years prior to the commencement of insolvency proceedings may be challenged if they were detrimental to creditors. For example, this may be the case when a parent company requires its subsidiary to contribute to the cash pool prior to insolvency so that the parent company can withdraw such funds to the disadvantage of the subsidiary’s creditors. If the transaction is annulled, the parent will have to pay back the sum representing the withdrawal.

c) Cash pooling agreement

Cash pooling arrangements should comply with general corporate and banking regulations, because there are no specific provisions dealing with cash pooling arrangements and cash pooling. Further, there are only a limited number of Serbian banks offering notional cash pooling arrangements, because, cash pooling is not as frequent financing method in Serbia. 

Transactions between a company and its shareholders who are subject to the duty of care or other persons that are subject to the duty of care (or their related persons) are deemed to be “transactions involving a personal interest”. Transactions involving a conflict of interest require the approval of the competent corporate body. Failure to comply with this requirement will render the cash pooling agreement between the conflicting parties null and void. However, if in court proceedings it can be proved that the agreement, entered into without the appropriate approval of non-conflicted board members / shareholders, is beneficial (to the company), a “fairness opinion” on the effects of the conflicted cash pooling agreement, delivered by a reputable auditor, might be considered as the proof required under the Serbian Companies Act.

d) Facility agreement

Apart from a definition of facility agreement, the Law on Obligations provides that facility agreement must be concluded in writing and determine clearly the amount of credit, as well as the conditions of lending, using and returning the credit. Further, the termination of the facility agreement is regulated by law, as well as the waiver of the contract before the determined deadline. The Law on Obligations’ provisions also regulate several types of facility agreements, namely facility agreement based upon the collateral of securities, credential and bank guarantee. 

e) Guarantee

The Law on Obligations further regulates the warrant given by the bank. Bank is obligated to, in the case that a third party does not fulfil its liabilities towards the warranty recipient, settle its obligations towards a third party, if all of the requirements listed in the warrant are fulfilled. Bank settles the obligation in monetary value, even in the event that the warrant secures non-cash liability.  It is possible that other bank corroborates the obligation arising from the warrant, in that event, warrantee can impose its requests as stated in the warrant to both bank which has issued, as well as to the bank which has corroborated the warrant. What is also possible is to transfer the rights from the warrant to a third party by a warrantee, but only in the event of transferring of the warranty secured outstanding debts to a third party, as well as transferring its obligations to a third party, existing in connection to a outstanding debt. One more subject is covered with the provision of a relevant law, which is a possibility that a warrant contains a non-objection clause. In that event the bank is disabled to make any objections towards the warrantee. 

a) Intro

Cash pooling arrangements may have following tax consequences:

b) Interest deductibility

Interest on loans from related parties is generally fully deductible, subject to limitations related to thin capitalisation restrictions and transfer pricing rules (arm’s length principle).

c) Withholding tax

Statutory withholding tax rate of 20% that applies to interest paid by a resident company to a non-resident lender, can be further reduced even to zero in case a favourable double tax treaty rate is applicable. In case the lender is a tax resident of a black-listed jurisdiction, the applicable withholding tax rate is 25%.

d) VAT rules

Pursuant to the Serbian VAT Act, financial services are in general VAT exempt without the right to input VAT deduction.