Are new legal forms for business entities, such as startups or companies founded by young people doing it for the first time, necessary to improve the business environment and economic growth in the Republic of Serbia? This is one of the questions for policymakers that is not fully addressed in the current presentation of political and economic programs.
Whether these forms could become a way of abuse if adopted, and whether they could be used to avoid paying taxes, remains a question for economic and legal experts. However, the question for politicians, that is, decision-makers, is whether these new forms could be one of the answers to increase the economic growth rate, as well as to address other problems such as emigration and attracting talent to Serbia.
The need for a new legal form is also indicated by research conducted by the “Digital Serbia” initiative, in which more than 60% of surveyed startups stated that their main problem is financing and the lack of a suitable legal form that fits modern types of business. Over 90% of the surveyed startups reported that they were partly financed from their own sources, while other forms of capital significantly represented in startup financing were grants and non-refundable funds, funds received from business incubators, and only in fifth place, funds from business angels.
The existence of a new form could change the financing structure in favor of sources coming from business angels – both foreign and domestic. Also, through a new legal form, economic policy for tax relief could be implemented in a more precise way. Startup founders from the mentioned research believe this too, as 7 out of 10 surveyed startups consider tax relief very important for encouraging a favorable development environment. Three out of four surveyed startups believe that establishing a new legal form adapted to modern business models would be the best direction for state support. All this indicates that one of the economic goals of the next government should be the definition and establishment of this legal form.
The importance of this sector for further growth and development is also shown by the fact that, among 167 surveyed startups, 10% were founded between 2010 and 2015, one third between 2016 and 2019, while more than half were registered between 2020 and 2022. However, in the central registry, almost 90% of startups are registered as limited liability companies. These data indicate that interest in technological innovations has increased exponentially over the last decade.
Unlike the traditional entrepreneurial sector, which bases its activities in trade, manufacturing, and hospitality services, startup entrepreneurs focus on new technological fields. Startups are present in database management, artificial intelligence development and use, and machine learning. Such a distribution of startups across sectors can be connected to the expected earnings by sector.
Looking at registered average salaries for August 2023, the average net salary in Serbia was 86,112 dinars. The average salary in computer programming was three times higher – 261,990 dinars. Considering that almost 90% of startups are related to software development, the startup community carries high potential for generating primarily average salaries, as well as overall growth and development of Serbia’s economy.
Another group that could benefit from introducing a new legal form for business entities are young people.
The general situation of young people in the labor market in Serbia can be most accurately assessed using the Labor Force Survey (LFS) conducted by the Statistical Office of the Republic of Serbia. According to the latest LFS data, in the second quarter of 2023, Serbia had 1,043,000 people aged 15 to 29. Of this number, about 517,000 were active in the labor market, meaning they were either working or actively seeking a job, while about 526,000 young people were inactive in the labor market.
To better understand the situation of young people in Serbia’s labor market, it is necessary to analyze the absolute number and trends of those in the so-called NEET position, that is, young people who are neither employed, nor in education or training. At the beginning of 2023, the NEET rate for young people aged 15 to 29 was 14%, meaning that every seventh young person in Serbia at the same time is neither in school nor employed. For young people aged 15 to 24, the NEET rate is 11.4%, and about 77,000 young people in this age group are in this unfavorable socio-economic position.
In line with this situation of young people in the labor market, as well as the strategic commitments of the Government of the Republic of Serbia regarding economic development, the Institute for Development and Innovation proposed an economic policy measure defining a youth company.
A youth company is not a new legal form, but uses the existing legal form of a sole proprietor with a flat-rate tax, which allows current laws in Serbia to remain unchanged and prevents exceptions in tax payments. The refund of flat-rate monthly obligations would be made for a maximum of one year and up to the revenue of the entrepreneurial flat-rate activity of 1,200,000 dinars, all to minimize possible abuse of the youth company. By implementing this economic policy measure, young people would be encouraged to pursue entrepreneurship, as they would not face obstacles in the form of financial resources needed for monthly flat-rate obligations in the first months of operation.
Since every fiscal policy measure leads to a cost or missed revenue for the general state budget, the cost of implementing the youth company policy should be considered before the proposal is rejected or adopted. At the Institute for Development and Innovation, we calculated costs based on variations in the expected number of youth companies, the municipalities where they would be established, and the sectors in which they would operate. To make the calculation more precise and cautious, scenarios were created to estimate the average number of months in which a youth company would receive financial support in the form of a refund of flat-rate taxes.
We concluded that, in relation to total budget allocations, this measure requires very little funding. Ten scenarios were processed, showing that the annual cost of implementing a youth company could range from 8.5 million euros to 33.4 million euros – which represents about six-hundredths of Serbia’s budget expenditures in 2023.
After all the calculations and proposals, what remains is the hope that the next government will have the attention and courage to consider the need for new forms for business entities in Serbia. Attention is needed because these business entities are necessary to accelerate economic growth, and courage is needed to tackle the implementation of this economic policy, which also includes preventing abuse – something society is very skilled at.
Author: Nenad Jevtović, economist, Institute for Development and Innovation
