Recently, the National Assembly of the Republic of the Serbia adopted amendments to the Law on Alternative Investment Funds (the “Law” or “Law on AIFs”). The amendments came into force on 6 December 2024.
The primary motive behind enactment of these amendments is to improve the Serbian capital market. The new regulation aims to foster a more stimulating environment for a greater number of investors and funds, making it particularly accessible to semi-professional and private investors by adapting with their realistic purchasing power, and removing certain administrative barriers. This is expected to facilitate larger investments into companies and enterprises, especially micro and small ones.
The amendments are not extensive, as only a small number were made, but they are significant. We shall now dive into them, to better outline their importance.
Overview of ammendments
Key changes:
Minimal investment for semi-professional investors – The minimum mandatory initial investment into the Alternative Investment Fund (“AIF”) has been lowered from EUR 50,000 to EUR 5,000. This reduces barrier to entry, making it more accessible to wider audience of investors. An investor is now required to invest for a minimum of EUR 5,000.00 as a one-time payment to become an investor in AIF. Afterward, they can make additional payments and invest as little as a few hundred euros to increase their position, because the law only sets the limit for first investment, not the subsequent ones in the same AIF.
This refers, as defined in the Law, to semi-professional investors, a type of retail (small) investors who meet the prescribed conditions. One of these conditions is the previously outlined amendment and the other is the assessment by the AIF Management Company (“AIFMC”) that the investor is suitable to be treated as such. This includes conditions such as understanding the risks of investment, having adequate experience in the capital markets, and so on.
Dual management of closed AIFs having the status of a legal entity – AIFs can be either open-end or closed-end. The closed-end AIFs can be further divided into those with the status of a legal entity and those without, and those with the status of a legal entity with internal management. Without delving deeper into these types, it is important to note that a significant change has occurred for closed-end AIFs that have the status of the legal entity.
This type of AIFs can be incorporated either as a limited liability company or a joint stock company, and is established and operated by the AIFMC on its behalf. Basically, the AIFMC manages the closed-end AIF, in the interest of that AIF. The amendment refers to the management structure of such AIF, stipulating that if the AIF’s share capital exceeds EUR 10 million (no matter in which company form incorporated) it must adopt a dual management system. Before the amendments, the threshold for this requirement was set at EUR 200,000.00.
The reason for this amendment is to simplify the incorporation, management and conduct of business for such AIF, by reducing the number of management personnel required to be appointed and involved in its operations, as long as it falls below the set threshold.
Minimal threshold for investing in an AIF with a private offering – the minimum required payment amount for an individual investor in an AIF with a private offering has been reduced to EUR 10,000.00 from the previous EUR 50,000.00. Again, the reasoning is quite simple – to make investments accessible to a broader range of investors.
Minimal threshold for investing in Private Equity AIF - the minimum required payment amount for an individual investor in a so called Private Equity Fund has been reduced to EUR 50,000.00 from the previous EUR 250,000.00. The reasons for this reduction are the same as for the AIF with a private offering, to make investing more accessible.
Establishment of the centralized Registry of Liens on Investment Units – a new Registry of Liens on Investment Units of AIFs is being established and will be operated by the Central Securities, Depository and Clearing House (“Central Register”). The aim is to facilitate and enhance stability, legal certainty and efficiency when establishing and collecting claims, especially debts.
By introducing a lien on investment units, an attractive legal instrument becomes available. Investors are now not only able to trade investment units, but also have the option to secure a loan or other monetary claim using this method. It is important to note that only one lien per investment unit is allowed, and it may be registered in the Central Registry.
The lien on investment units offers a more secure method of payment to the creditor when collecting debt, while providing the debtor with increased ability to repay it back and greater access to liquid assets. Bearing that in mind, it made sense to establish a centralized record, maintained and operated by a single body – the Central Register. In short, it allows for everything to be in one place.
Before these amendments, this instrument existed, but the evidences, records and registries were maintained and operated by AIFMCs for an AIF under their control. This approach affected transparency, as the AIFMC may have its own interests, which could be contrary to those of the creditor, especially since it operated the investment units of an AIF which were pledged. Additionally, the system impacted legal certainty, simplicity and the efficiency of collecting the claim etc.
With this unified Registry, the records of liens on investment units are transferred from AIFMCs to the Central Register, addressing all the mentioned issues, particularly the problem of fragmented records.
Effects on tax benefits
One indirect change introduced by the amendments to the Law on AIFs relates to tax benefits for high-income earners when investing in AIFs. Specifically, these individuals who would normally be subject to annual personal income tax, would invest in AIFs and reduce their annual personal income tax liability by 50%. The most peculiar aspect of such practice was that there was no specific term set for how long they need to hold their investments in an AIF before cashing out.
Theoretically, one could have invested in an AIF and withdraw their assets the following day, thereby achieving a 50% tax reduction, as long as certain conditions regarding dates were met (for example, investing on 31 December of the calendar year and withdrawing on 1 January of the following).
These actions deprived the investment funds and their managers of much needed capital, which was intended to be invested in various assets.
Aware of this loophole, the Ministry of Finance, in conjunction with the amendments to the Law on AIFs, also made changes to the Law on Personal Income Tax to prevent such practices. Now, an investor must hold their investment in an AIF for at least three years before selling in order to qualify for the 50% tax reduction.
This solution, however, is not without its flaws. Someone must monitor and determine whether an investor cashed out before the expiration of the three-year period. Additionally, it remains unclear whether the AIF or its management company (AIFMC) will be responsible for reporting such cases to the Tax Administration? Furthermore, why does this solution apply only to AIFs, and not to other investment funds, potentially violating the equality among different investors and subclasses / subcategories of investment property? These and other questions remain unanswered.
Concluding remarks
As can be clearly seen, the above amendments should further accelerate the development of the Serbian capital market. By making it accessible to a wider range of investors, and simplifying certain aspects, that the goal is to foster upward trajectory in Serbia’s investing culture. Additionally, a higher number of AIFs and AIFMCs are expected to be incorporated and become operative to meet the growing demand for investment in this type of investment units.
However, the adopted amendments do not necessarily mean that everything is overly simplified. One must navigate through a complex web of laws and by-laws to fully capitalize on these newly established benefits.
Therefore, it is always recommended to hire legal and other professionals with extensive expertise in this area, to avoid any potential issues and obstacles when realizing your business and investment goals.
Author:
Senior Associate
For more information abouts the latest amendments please contacts us at: office@lexquire-ivvk.rs
*The information in this document does not represent legal advice and is provided for general informational purposes only.
**Partner, Senior Associate, Associate and/or Junior Associate refers to Independent Attorney at Law in cooperation with IVVK Lawyers in Cooperation with LexQuire.
10/12/2024
