The National Assembly of the Republic of Serbia has on 20 April 2018 adopted amendments to the Foreign Exchange Operations Act (“FEXO”) in order to meet the requirements stemming from the Stabilization and Association Agreement (SAA) with the European Union. These provisions, now allow, amongst other things, for the free movement of capital related to portfolio investments and short-term finance loans and credits.

To be more exact, the newly introduced provisions entail that resident natural persons, legal entities as well as entrepreneurs can freely perform the sale and purchase of foreign short-term securities issued not only by the Member States of the EU but by the EU as well as by the legal entities with their registered office within a Member State of the EU. Further on, both residents and subsidiaries of non-resident legal entities are now allowed to get short-term loans or credits from a non-resident, with its registered office / permanent residence in a Member State of the EU.

Yet, it seems as if there are still some crucial points on which the legislator has turned a blind eye. For instance, foreign investors have, on more than one occasion emphasized that it is more troublesome for them to invest in the Republic of Serbia given the fact that certain institutes such as cash pooling are still not allowed.

Cash pooling, which is useful for optimizing the liquidity of an international group of companies, by providing the transfer of the excess liquidity or the pulling of the needed means ultimately leads to a significant reduction of the external expenses of financing and the administration of money. Thus, it is no surprise that foreign investors value this mechanism to a great extent.

However, when speaking about cash pooling it seems as if the Republic of Serbia has a long way to go yet. That is mostly because resident legal entities still remain subject to certain limitations when obtaining or giving loans abroad. Such limitations consequently prevent foreign investors to freely transfer the excess liquidity or to transfer the needed means for their business. As a result, the flow of their capital in the Republic of Serbia is limited to a certain extent.

Additionally, it is still a puzzle why the issuing of guarantees under guarantee operations is not allowed between two non-residents, albeit the fact that under credit operations there is no such prohibition. The rationale behind this solution is certainly equivocal if we have in mind the institute of guarantees on first demand. In such situations, the creditors activate their guarantees towards the issuer of the guarantee, upon maturity date. Consequently, the issuer is obliged to fulfill the debtor’s obligation towards the creditor, if the debtor has no funds. It is in that moment that the relationship between the debtor and the issuer of the guarantee factually becomes a short-term credit operation. The effect of the provision thus equals to a security under a credit operation. Henceforth, it seems as if the prohibition on securities for issuing guarantees does not provide for the desired effect, as the end result is, either way, the same since it represents a credit operation.

It goes without saying that FEXO is one of the most criticized acts mainly because the legislator remains reluctant on the complete liberalization of capital flow. Subsequently, investors feel demotivated to start their business on the Serbian trade market.

Notwithstanding the aforesaid, it is worth mentioning that these Amendments do represent an important step towards the liberalization of capital market as well as an important step towards the abilities given to both residents and non-residents in regards to foreign exchange operations. Nevertheless, if the Republic of Serbia intends to attract more foreign capital in its market, it should be both prepared and willing to liberalize the provisions concerning foreign exchange operations as much as possible.