Interested in investing in the Serbian IT industry? In our article we will describe the main phases of the acquisition of a Serbian IT company, and explain, why is it worth investing in Serbia, what tax incentives are available for IT firms, how to target the right Serbian IT company, and other important questions.
Reasons to invest in Serbia
The Serbian tech industry is a very dynamic industry. Serbia is a proud nation of great scientists (Nikola Tesla, Mihajlo Pupin, Milutin Milanković), the School of Electrical Engineering (University of Belgrade) and Mathematical Grammar School are recognised worldwide – their students continue their education at the world’s best universities and work for the largest technology companies.
Serbia generates 10% of GDP from the ICT sector and is one of the main exporting industries. The country has such successful start-up stories, as the Nordeus (Top Eleven Football Manager), FishingBooker (Airbnb of fishing trip charters) or 3Lateral (designing games such as GTA V, Batman, and Spiderman). It is one of the best outsourcing and nearshoring destinations in Europe and many multinational technology companies are already doing business in Serbia (Microsoft – Development Center, SAP, NCR).
There are many reasons to invest in Serbia, but for the technology sector two reasons are especially important. These are the attractive workforce and the significant tax incentives available for a Serbian IT company.
Labor environment in Serbia
Foreign companies like to work with a Serbian IT company for the following reasons:
- Good knowledge of English language and other European languages (mainly German)
- Compatible cultural background: Serbian culture is a specific mix of Western European, Eastern European (Slavic), Mediterranean, and oriental influences. Therefore, employees from Serbia can adapt to working with people from everywhere.
- Time zone: Serbian time is only one hour ahead of London time
- Cost efficiency
The total number of employees in the ICT (information and communication technology) sector in Serbia was 105,572 in Q4 2021, which is an increase of 9.2% in comparison with the same quarter of 2020. The total workforce in ICT is 4.7% of a total number of employees in Serbia (source: Republic Office for Statistics, Republic of Serbia). In 2021, average net salary at a Serbian IT company was approximately EUR 1,500 / month.
Corporate income tax incentives for a Serbian IT company
The government of the Republic of Serbia issued changes in Corporate Income Tax Law several years ago in order to help Serbian companies which are developing intellectual property and other intangibles (such as own branded software). Those are the following incentives:
- Research and development expenses are deductible in double the amount in the tax balance sheet.
- 80% of revenue is generated on the basis of intellectual property registered in Serbia (except the transfer of ownership right on the property), after some adjustments are made.
Investments into the equity of a newly founded innovative company are subject to a tax credit in the amount of 30% of made investments. The maximum amount of tax credit for investment in one company is RSD 100 million (roughly EUR 850,000) and can be used in a period of up to three years. The total amount of tax credit that can be used in one fiscal year is RSD 50 million (roughly EUR 425,000).
Separately from tax incentives available for an innovative Serbian IT company, for all companies in Serbia, there is an opportunity for ten year of corporate income tax holiday if:
- investments in fixed assets are made in amounts higher than RSD 1 billion (roughly EUR 8.5 million),
- at least 100 people are employed.
Although the standard corporate income tax rate is fairly low (15%, regardless of the level of generated revenue), it can get significantly lower with these incentives.
Personal income tax incentives for a Serbian IT company
There is a possibility for tax relief on the part of personal income tax liabilities:
- for Serbian citizens who did not live in Serbia for at least 12/24 months before entering into a labour agreement with a Serbian company,
- for employees who work on research and development activities,
- if employing persons who were registered as unemployed for at least six months,
- if employing disabled persons.
Targeting the right IT company
When identifying the right target for acquisition, you need to start with your strategy. You need to ask yourself:
- Where is my company (business) right now? What is my strategy for the next period?
- What do I want to achieve with my acquisition? How will that affect my existing business and my strategy?
- What do I want to do with the acquired company?
- What resources (financial and other) do I have in order to perform the acquisition?
From a financial perspective, there are three main reasons to acquire a company:
- Buying an undervalued company: you are able to purchase a company for a much lower price than its value
- Better management: you are able to manage the company in a better way than the current owner (better financing, higher revenue – new clients and new projects, lower expenses – higher efficiency)
- Synergy: your company and the company you acquire value more together than if they operate separately. You may be able to finance a consolidated company for lower costs. Market strength of a consolidated company could be greater (e.g. you become more attractive for new clients when you unite your resources). The consolidated company could operate more efficiently (less overhead expenses, smaller administration staff, etc.)
After you answer all these questions, you will be able to form a profile of your target Serbian IT company. You may use qualitative criteria, such as:
- type of services provided
- type of industry it provides services to
- country in which it operates
Also, quantitative criteria are important, such as profit margins, level of generated revenue, level of debt etc.
Cooperating with the target
You may already know your target. Maybe you already cooperate with a Serbian IT company. You know the owners, the employees, and the quality of work they perform. But before you go in negotiation, you should take a glance at their financials:
- What is their revenue growth? Did sales prove to be immune to crises (Covid19, recession, Russia – Ukraine war, etc.)?
- What about their bottom line? Do they have a proven track record of several consecutive profitable years?
- Are they in excessive debt? Were their bank accounts frozen?
At the end of initial negotiation, you should agree on some general conditions of acquisition, as well as on non-binding and indicative purchase value.
Part 2 of this article covers the second part of the process of buying IT company in Serbia: M&A analysis, acquisition agreement, and post-acquisition integration. If you are interested, please click here!
The consulting team of WTS Serbia has extensive experience providing services to technology clients. WTS Serbia is a one-stop shop advisory firm that can assist you in the whole process of acquiring and managing a Serbian IT company (including identifying and also contacting new target IT companies).