Legal treatment of foreign investors in Serbia
On 23 October 2015, the Serbian Parliament adopted the Law on Investments (the “Law”). The new legislation replaced the Law on Foreign Investments and established a new institutional framework for subsidizing foreign and domestic investments. Within four months from 4 November 2015 (the date when The Law came into force), the Development Agency of Serbia and the Council for Economic Development were supposed to be established with the aim of, amongst other, promoting, developing and managing the investments.
According to The Law, the term “investment” includes shares in Serbian companies, branch opened by a foreign company, proprietary rights on movable or immovable assets (ownership, pledge, easement), intellectual property, right to perform an activity in accordance with public-private partnership arrangement, activity pursued on the basis of an authorization issued by a public authority. The law specifies that trade receivables, receivables under a loan extended for “trade financing” and portfolio investments are not captured by the term “investment”.
The Law has several provisions with the aim to protect the investors. For instance, The Law prescribes the protection of acquired rights (Article 5) stating that the investor shall enjoy full legal security and legal protection with regard to rights stemming from the investment. An important novelty is a provision according to which, in case of expropriation of real estate, investor will be entitled not only to compensation for the seized property (at its value before the announcement of the intention to expropriate), but also to compensation for the decreased value of the business caused by expropriation (Article 6). In case of distribution of state aid to investments of special importance, no public invitation to investors is required (Article 11).
Additionally, according to the Law, public authorities should treat applications from investors as a priority. If public authorities, except for the Commission for the Protection of Competition, fail to issue a necessary approval stated in the investment program upon complete and timely application of an investor, the latter will be able to address the Development Agency. To further stimulate expeditiousness of public servants, the new law introduces fines in the amount of up to RSD 150,000 (approx. EUR 1,300) if they fail to resolve complete applications of investors in due time. Finally, investors can also expect some benefits such as state aid, tax incentives, relief from payment of administrative fees, customs incentives and incentives related to compulsory social insurance.
As for the resolution of potential disputes for breach of investors’ rights, the Law stipulates that parties may try to resolve amicably disputes arising from the investment, but also that the disputes arising from the investment can be resolved before the courts or arbitral tribunals, in accordance with the law.
In terms of expectations and protection of foreign investors, there are more than 50 Bilateral Investment Treaties that Serbia signed (“BITs”). BITs give additional protection to the investors and they are signed with the following countries: Albania, Algeria, Austria, Azerbaijan, Belarus, BLEU (Belgium-Luxembourg Economic Union), Bosnia and Herzegovina, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Finland, France, Germany, Ghana, Greece, Guinea, Hungary, India, Indonesia (signed, not in force), Islamic Republic of Iran, Israel, Italy (signed, not in force), Kazakhstan, Democratic People's Republic of Korea, Kuwait, Libya, Lithuania, The former Yugoslav Republic of Macedonia, Malta, Montenegro, Morocco (signed, not in force), Netherlands, Nigeria, Poland, Portugal, Romania, Russian Federation, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, United Arab Emirates, United Kingdom and Zimbabwe.
All these BITs stipulates additional protection for the foreign investors in Serbia. Additionally, they all prescribe several levels of possible solutions for potential dispute resolution. The first level implies an attempt for amicable solution (usually through negotiations, if necessary by seeking expert advice, or by conciliation between the Contracting Parties through diplomatic channels).
In the absence of amicable settlement, the dispute shall be submitted, at the option of the investor, either to the competent jurisdiction of the contracting party where the investment was made, or to the arbitration as an alternative dispute resolution forum. Most of the BITs contain an option for the investor to address the following forums:
Dispute resolution options – arbitration vs state court
In terms of resolving the commercial disputes between foreign investors and their contractual partners, the foreign investors may choose to stipulate in their agreements whether their disputes will be resolved by the state courts or arbitration.
Arbitration proceedings in Serbia today are governed by the Law on Arbitration (Republic of Srpska Official Gazette No 46/2006), adopted in 2006. Taking into consideration the disputes that arose after the Law on Arbitration was passed in 2006, more than 250 parties from around the world took part in international commercial arbitration on the territory of the Republic of Serbia. The Law is fully compliant with the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration of 1985. However, the Law on Arbitration does not completely conform to the latest (2006) version of the UNCITRAL Model. Additionally, Serbia is a signatory to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (signed and ratified by 150 states) and it has fully implemented the convention with its Law on Arbitration.
Arbitration represents an alternative to resolving disputes before the state courts. Parties can agree to arbitrate a dispute arising out of a domestic or international business transaction, or any private law matters which the parties can freely dispose of, except for disputes that are reserved to the exclusive jurisdiction of the courts.
The cornerstone of a successful arbitration lies in the independence and impartiality of arbitrators appointed to settle a dispute, providing a guarantee that an arbitral award will be an unbiased one. The outcome of arbitration is an arbitral award that is final and binding upon the parties. Given that the state courts where the arbitration is seated have jurisdiction for the proceedings for annulment of the award, the investor should consider what would be the most appropriate seat of arbitration they will choose. Award rendered in Serbia has the power of final and enforceable court decision and does not need to go through the process of recognition, thus it is directly enforced as any court decision of the state courts. Additionally, the Serbian courts are very liberal when it comes to the proceedings for annulment of arbitral awards, i.e. it would annul the arbitral award only when very static reasons from the Law on Arbitration are met. Furthermore, in the proceedings for annulment of the award the Serbian court will not go into the merits of the case decided by the arbitral tribunal unless the breach of the public order of Serbia is in question.
There are numerous reasons for choosing arbitration over the judicial dispute settlement system, such as:
On the other side, potential disputes can be resolved by the Serbian courts. Commercial courts in Serbia (which would be competent for commercial disputes between commercial entities), usually resolve the case in two or three years as of the initiation of the proceedings. Compared to other courts and/or disputes, Commercial courts are pretty efficient. However, the weak point is lack of the training of the judges for this type of the proceedings which affects the quality of the judgements. Keeping that in mind, we certainly recommend arbitration as a dispute resolution forum.
The choice of law is subject to autonomy of parties’ will. By choosing Serbian law as competent, investors may avoid potential unconsciousness of the fact that chosen law may not be applied, due to the fact that there are several situations where choosing the competent law other than Serbian can be forbidden (e.g. if the effects of the foreign law are contrary to the fundamentals of the social system established by the Constitution of the Republic of Serbia, or if the law of a foreign country which might be applicable was chosen just with the aim of evasion of application of Serbian law). If the parties choose the state court as a dispute resolution mechanism, we certainly would recommend the Serbian law as applicable, given that the judges are often reluctant to obtain the content of the foreign law and that application of the Serbian law by the local judge is a far more efficient option.
Enforcement of the decisions
The new Law on Enforcement and Security (Republic of Srpska Official Gazette No 106/2015) entered into force in December 2015 (most of the provisions of this Law were applicable only as of 1 July 2016) (“Enforcement Law”). The Enforcement Law has introduced a number of innovations compared to the previous law in this matter with the aim to speed up the proceedings, but also to harmonize the court practice. Adoption of the Enforcement Law was a step forward in the already established system since 2012 - when the private enforcement agents were introduced. Conducting the enforcement proceedings by public enforcement agents affected the duration of the proceedings, so the entire enforcement can be performed for less than a year (if the debtor has the property which can be subject to enforcement). However, several problems in this area remained, but some of them has been resolved upon initiative of lawyers and bankers. The greatest problem in this area was about the provision concerning the transfer of claims and the right of the acquirer of the claim to initiate the enforcement proceedings as the creditor. The Serbian courts tended to interpret the Enforcement Law in the way that the acquirer of the claim can only appear as the enforcement creditor if his right to acquire the claim derives from the court decision or the law. The Serbian courts denied the right to enforcement to creditors who acquired the claims by contract on assignment. However, after a number of discussions, round tables and conferences, the Serbian Parliament issued a new interpretation of this debatable article of the Enforcement Law on 17 December 2017 – leaving no doubt that the transfer of claim refers both to transfer based on law (or court decision) and contract.