Obligation in Case of Payment of Stocks in Foreign Companies on Behalf of Employees
"The Questions Are the Answers You Might Need"
A Common Story in the IT Industry
Let’s start with a warm story familiar to the IT sector:
A Serbian national and experienced software developer begins working with a U.S. company, providing software development services remotely. The partnership proves fruitful, and soon the U.S. company recognizes the benefits of hiring more Serbian engineers. A small development team forms in Serbia.
Eventually, the U.S. entity establishes a Serbian subsidiary to hire the team directly. Our original developer? He's been promoted to director of the subsidiary, overseeing the operations on the ground.
As the company grows and new projects roll in, the director, collaborating with the U.S. management, decides to introduce a global equity compensation plan. The idea is to reward employees with shares in the U.S. parent company. Options like stock options, restricted stock units, and employee stock purchase plans are explored.
Unsurprisingly, the team reacts with excitement, dreaming of a financially secure future for themselves—and maybe even their grandkids. Jolly good!
A Legal Complication: Enter the FX Law
While spirits are high, the director should pause and consider a few critical legal issues—specifically, those relating to Serbia’s Foreign Exchange Law ("FX Law") and its accompanying bylaws. These are strictly interpreted and enforced by Serbia’s central bank, the National Bank of Serbia ("NBS").
Phrases like “cross-border payments,” “non-residents,” and “residents” begin echoing in the director’s mind. It’s understandable—he’s more comfortable with code than complex legalese.
So, What’s the Issue?
In this case, a U.S. entity (a non–resident under the FX Law) wants to grant stocks to employees of its Serbian subsidiary (a resident). The stocks can be:
- Purchased directly by the employees, or
- Purchased by the Serbian company on their behalf.
In the latter scenario, the Serbian company transfers funds to the U.S. entity, covering the cost of the stocks and related expenses. The employees become shareholders in the U.S. parent company.
From a legal standpoint, this is generally permitted under the FX Law. Serbian residents (both individuals and legal entities) can legally make and receive payments related to the purchase and sale of securities, including stocks.
There is, however, one formal restriction:
The total value of stocks per employee must not exceed 10% of the capital of the U.S. entity.
On its face, that doesn’t sound too bad. Just stay under the 10%, and all is well... right?
The Real Concern: Interpretation by the NBS
Here’s where things get tricky.
A bylaw to the FX Law defines who must report investments in foreign securities to the NBS. The list of reporting entities includes:
- Investment companies (brokerage firms and licensed banks),
- Custodian banks,
- Banks providing safekeeping and securities management services,
- Investment fund managers,
- And other entities that issue or hold securities.
Nowhere in the bylaw is a scenario like ours—where a local subsidiary buys shares on behalf of employees—explicitly mentioned.
But here's the catch: the NBS has issued its own interpretation (via a Q&A section on its website) that does apply this reporting obligation to such situations. According to the NBS, the Serbian subsidiary making the stock payment can be considered a reporting entity.
What This Means for You
This interpretation has serious implications.
Failing to comply with the reporting requirements—even unintentionally—can lead to significant financial penalties for both the company and the director. A seemingly harmless idea to boost morale with equity compensation could result in misdemeanor proceedings if the FX Law is interpreted or implemented incorrectly.
The Takeaway: Ask First, Act Later
So, while everything may seem perfectly logical and straightforward from a business perspective, the law may tell a different story. Reflecting on the NBS’s Q&A and the lyrics of Oasis’s "D’You Know What I Mean":
“The questions are the answers you might need.”
To all the directors and founders looking to offer stock incentives:
Always consult a lawyer before implementing equity plans, especially when foreign payments and securities are involved. Legal advice is far cheaper than legal trouble.
Need Help?
If you're planning to introduce stock-based compensation for employees in Serbia, or already have, feel free to reach out to PwC for guidance.
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