The need for management contracts arises when an employer needs to arrange for a relationship beyond that of one with a simple employee – one with an individual performing managerial or supervisory tasks. Therefore, the relevant labor laws (in the Federation of Bosnia & Herzegovina, Republika Srpska, and Brcko District of Bosnia & Herzegovina) introduce management contracts that offer an alternative for the employer to conclude an agreement with a manager without establishing actual employment. The aim is for a more flexible arrangement of said business relationship or established employment which is absolutely subject to the provisions of the relevant labor laws.
It should be noted that in the case a management contract is concluded without establishing employment, the tax base is constituted by the manager’s total income. Thus, income tax at a rate of 10% will be paid on the tax base, which includes not only the compensation agreed upon between the employer and the manager but also all other expenses incurred during the duration of that relationship. For instance, entering into an employment contract for a definite or indefinite period or concluding a management contract with established employment implies the non-taxation of specific allowances disbursed by the employer, such as bonuses, official travel expenses, a certain amount for meals, etc. However, compensation that would be paid to the manager based on a concluded management contract without establishing employment is fully subject to taxation in accordance with prevailing income tax laws (“income from other independent activities”) and the Temporary Opinion of the Tax Administration of the Federation of B&H since 2015.
The concept of a management contract is not precisely defined in the aforementioned regulations, meaning that practical questions arise concerning the implementation of this type of engagement – especially considering that numerous provisions of labor laws don’t apply, including provisions related to employee remuneration. Recognizing the fact that rewarding top managers is a significant mechanism in corporate governance, this ambiguity has created numerous dilemmas. For instance, employers have questioned whether they can pay a single compensation to a manager who oversees the work processes in multiple affiliated companies of the original employer under the condition that one management contract includes the mentioned compensation, while the other contracts do not involve an established employment relationship and compensation, or whether the compensation can be determined as a percentage relative to the value of profitable decisions brought to the company, along with many other questions.
These dilemmas among employers in Bosnia & Herzegovina were expected, as managers often received bonuses or other benefits in addition to their basic fixed monthly salary (prior to the introduction of this institute) based on the level of success in managing the company or the specific task at hand. The relevant ministry publicly released an opinion regarding these practical dilemmas. It stated that when concluding a management contract, the nature of such a contract should be considered, emphasizing that the contract is indeed a labor law institute and should contain basic elements such as salary/compensation.
However, it is believed that the elements of a lawful labor relationship will be fulfilled even if compensation is determined solely proportionally (in line with a Decision of the Supreme Court of the Federation of Bosnia and Herzegovina – 23 0 Rs 027961 19 Rev from August 13, 2020). At the same time, the obligation to submit management contracts to the Pension and Disability Insurance Funds (Federation of B&H and Republika Srpska) is not perceived as irregular, even when processed by the respective fund, regardless of the fact that the compensation is neither specified nor determinable.
In light of the aforementioned, the competent authorities have not taken a unified stance regarding the provisions concerning salary/compensation when concluding a management contract, nor is this institute extensively regulated by other statutes (keep in mind that the publicly released opinion is not legally binding). Concluding a management contract without compensation can pose a risk in the event of a tax inspection. Since the employer is obligated to pay income tax from the worker’s income, tax officials during tax audits might determine that the management contract was concluded without compensation in an attempt to evade tax obligations.
Furthermore, apart from what’s mentioned, entering into a management contract without establishing an employment relationship and without compensation could expose the employer to risk if the manager later claims compensation for the work performed, as everyone “has the right to fair pay.”
By Leila Salijevic, Head of Labor, Ibrahimovic & Co