There are certain new developments related to employee share schemes (“ESS”) in Serbia that could finally lead to enabling of application of foreign companies’ ESS to Serbian employees as well. Foreign companies commonly expressed interest to offer some form of ESS to the employees engaged in their subsidiaries in Serbia, allowing them to profit of parent company’s success. The Serbian legislation is silent on the ESS and, until now, approach of the Serbian regulatory bodies was rather restrictive in this regard.

Securities Regulations

In the absence of clear regulation, the Serbian Securities Commission (“SEC”) is seeking for a potential solution to enable cross-border offering of the ESS’ in Serbia, which has been to a large extent impeded by the ambiguities of the Securities Law. Formally, this regulation should not apply to issuing/trading with financial instruments out of Serbia. However, once the offer is made to Serbian residents, there are no clear guidelines to determine when it could be deemed that such offer is made out of or in Serbia. With a view to protect employees in Serbia, the SEC has issued several official opinions so far, whereby, among other, the SEC expressed its view that any type of notification provided to employees in Serbia may be considered as a public offer under the Securities Law.

Nevertheless, in March 2019 the SEC shed further light on this matter, stating that in the case when the initiative to participate in the ESS was taken by the employee, the Serbian securities regulation should not be triggered. This opinion is based on the understanding that such offer shall be deemed as made out of Serbia, and the investment services in connection thereto as conducted abroad.

To be on the safe side, certain actions that would document the employee’s initiative are advisable.

For instance, the employees interested in participating in the ESS shall send an email to the Serbian subsidiary, requesting to take part in the ESS. After collecting the data and emails of all interested employees, the local company shall send an initiative for participation in the ESS to the parent company on behalf of all interested employees. Upon review, the parent company should determine if the interested employees are eligible and respond to the initiative via email or in other written form. All ESS-related correspondence should be saved for recordkeeping.

Foreign Exchange (FX) Regulation

Depending on the type of the ESS, Serbian FX regulation may have an impact on the ESS transactions. Although Serbian residents are permitted to make payments for purchase of foreign shares, stricter rules apply to cross-border transactions with financial derivatives. Specifically, residents may perform financial derivative transactions at OTC market only for hedging purposes and in respect of certain risks (including the price fluctuation risk for securities). Thus, it should be ascertained on a case-by-case basis whether the ESS would qualify as a financial derivative and the practical consequences thereof.

For instance, the most common type of the ESS involve an option to buy the shares after certain vesting period at a previously set price (strikethrough price). If qualified as an option, the ESS would have to comply with the FX regulation. Usually, no cross-border payments are required for the acquiring of the ESS, but only upon its exercise (i.e. purchase of shares), and as such should not cause any material FX implications. If, on the other hand, the employee is obliged to pay a certain premium for the ESS itself, it may be qualified as a transaction entered into for the purposes of hedging against the price fluctuation risk for securities.

Nevertheless, the ESS models involving other potential types of financial derivatives would have to be closely observed to determine its feasibility from the perspective of Serbian FX requirements. It should be emphasized that the FX regulation aims to protect the residents by preventing possible speculative transactions, hence any trading of the ESS would not be permitted. Although the ESS are usually non-tradeable and pro-employee, each model of the ESS should be carefully assessed to ensure its compliance with the applicable local legislation.

Ultimately, it remains to be seen how the newly issued opinion of the SEC will impact the further offering of ESS’ in Serbia.