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10. septembra, 2021

SERBIA: Profit – sharing with employees – employee participation in the distribution of realized profit

Subject and basis for payment

The share of employees in the distribution of realized profit is not considered as earning, instead, it has the character of other income. Article 14. of the Labor Law stipulates that an employee’s contract or a decision of the employer may determine the employee’s participation in the distribution of realized profit. According to the Law on Companies, in order for employees to be entitled to this right, it is necessary to be regulated by the general act of the company and that the assembly or board of directors make a decision on the profit distribution.

The subject of profit distribution is the amount shown in the business books on account 340- Retained earnings of previous years. The decision is made after the preparation of financial reports for the previous year.

Tax treatment

Since the share of employees in the profit distribution has the character of other income, it is taxed by the Law on Personal Income Tax by applying a rate of 20% on the basis that is equal to gross income reduced by standard costs of 20%. This type of income is also included in the annual personal income tax. According to the Ministry of Finance and Economy, the contribution for pension and disability insurance in the amount of 25,5% on gross income reduced by 20% of standard costs is calculated on these incomes of employees.  If the income is determined in the net amount, it is necessary to convert it to gross by applying the coefficient of 0,636. Divide the net amount by the coefficient to get the gross amount.

The company as a payer of income has the obligation to calculate, suspend and pay taxes and contributions at the time of income payment, as well as to file a tax return PPP-PD. The code of income type, which is entered in the tax return PPP-PD for the payment of employee participation in the profit distribution is 616.

Accounting aspect of profit sharing

According to International Accounting Standards, all income of the employees is considered as an expense in the financial reports in the period in which they are incurred. By our regulations, when it comes to the participation of employees in the profit distribution, this payment is not recorded as an expense of the period, but as a reduction of retained earnings. This treatment deviates from the requirements of International Accounting Standards.

Calculation of taxes and contributions

If the amount of participation in the profit distribution is determined in the net amount, then we will first convert from net to gross as following:

Count Description Amount
1. Net employee profit share 100.000,00
2. Coefficient for conversion to gross 0,636
3. Gross profit share (no.1 : no. 2) 157.232,70
4. Standard costs (20% on no. 3) 31.446,54
5. Taxable income (no. 3 – no. 4) 125.786,16
6. Tax on other income (no. 5 x 20%) 25.157,23
7. Contribution for The Pension and Disability Insurance Fund (no. 5 x 25,5%) 32.075,47
8. Net profit sharing for employee payment (no. 3 – no. 6 – no. 7) 100.000,00



Example of posting:

Payment of employee participation in the distribution of profits is debited to retained earnings by the following posting item: