In December 2019, National Assembly of the Republic of Serbia adopted amendments to the Law on Personal Income Tax (“Official Gazette of the Republic of Serbia”, no. 24/2001… 5/2020).
Recent changes deals with the status of entrepreneurs (preduzetnik), a particular category of commercial entity, most convenient for individual small businesses and freelancers. In this regard, the Entrepreneur Independence Test has been introduced as obligation and will begin to apply starting from 1st March 2020.The main purpose for introducing of independence test was to prevent entrepreneurs and their clients to present their relation as such, while they are actually in employment relationship (employer-employee), all because more favorable tax reliefs applicable to entrepreneurs.
Namely, Article 85 of the Law on Personal Income Tax provides 9 (nine) criteria for determining the independence of entrepreneur. If the entrepreneur fulfills at least 5 (five) of those criteria, it will then be considered as the entity in actual employment relation and subject to income tax treatment applicable to employees, instead of entrepreneurs.
Those criteria are:
1. Client determines working hours, vacation and other leaves for entrepreneur, while the entrepreneur’s fee does not get proportionally reduced for the time spent on vacation;
2. The entrepreneur normally uses premises provided by the client or performs business activities in a place designated by the principal for the purposes of performing the tasks entrusted to entrepreneur;
3. Client conducts or organizes professional training or development training, or usually manages the entrepreneur’s work process;
4. Client hired the entrepreneur after publicly advertising the position for natural persons, or through the third party recruitment services, which resulted in hiring the entrepreneur;
5. Client provides his own basic tools, equipment or other basic tangible or intangible assets necessary for the regular work of the entrepreneur or the client usually manages the entrepreneur’s work process.
6. At least 70% of the entrepreneur’s total income over a 12-month period comes from a single client;
7. Entrepreneur carries out activities which are part of client’s business, while the contract for such activities does not stipulate a clause under which entrepreneur bears the usual business risk for the job delivered to client’s client, if such clients exist;
8. The entrepreneur’s contract contains a clause that partially or fully prohibits entrepreneur from providing services to other clients; and
9. The entrepreneur performs paid business activities for the same client continuously or intermittently for 130 or more business days over a 12-month period, whereby performing activities in one working day is considered to be performing activities in any period during that working day between 00 and 24 hours.
If the entrepreneur fulfills at least 5 (five) of the above criteria, the income the entrepreneur earns is taxed as “other income” (tax rate of 20%) and not as income from self-employment. This income would be taxed in full and without the possibility of deducting standardized costs, with the tax rate of 20%. In addition to this tax, there is also an obligation to pay pension and disability insurance contributions (PDI).
Contrary to this, entrepreneurs who are excluded from VAT system (with the annual income up to 6 million dinars – approx.. 50.000 EUR) are subject to month lump-sum tax which amounts approx.. 100-200 EUR, depending of the region where they are registered.
Who bears responsibility for the status of a fictitious entrepreneur and who bears the burden of paying taxes, if the entrepreneur is found to meet the above criteria ?
This type of tax and contribution for the PDI will be calculated and paid withholding, which implies that the burden of responsibility falls on the client (employer), i.e. the client will be finally responsible for paying taxes and contributions.
In this connection, the essence is reflected in the fact – if the competent tax authority, in the tax control process, determines that there is a fictitiousness and dependence of the entrepreneur in relation with the client, the client will then be obliged to pay taxes and contributions on the basis of paid income to the entrepreneur. Also, the client will be required to pay interest rate, according to the National Bank of Serbia’s annual reference rate, plus ten percentage points (e.g. if Bank of Serbia’s annual reference rate is 2,25 % then 2,25%+10 %= 12,25%).
Among other things, client may be punished for a misdemeanor (or even a criminal offense) for a failure to pay withholding tax on this basis.
However, if the entrepreneur was generating income from a foreign legal entity, in the event that the entrepreneur’s dependence on the client is determined, the entrepreneur itself would be obliged to determine and pay the tax and contribution for the PDI on the basis of the income it generated from that entity.
Tax Reliefs and Incentives
In conclusion, we draw attention to the tax incentives that the legislator directs and stimulates companies (clients) to employ “their fictitious entrepreneurs”. In this regard, for a period of 3 years, starting on 1 January 2020 tax credits are available to the companies:
* If the companies increase the number of their employees;
* If the companies hire employees who were not employed in the period between 1 January 2019 and 30 April 2020, and if the companies hire those people by the end of 2020, at the latest.
* The tax incentives can also be used for the employment of entrepreneurs who were not employed during 2019, if they get employed by the end of April 2020.
The company is exempted from the obligation to pay payroll taxes and PDI contributions for the above persons, as follows:
* 70% of the payroll tax and contributions of the PDI in 2020;
* 65% of the payroll tax and contributions of the PDI in 2021;
* 60% of the payroll tax and contributions of the PDI in 2022.
Finally, the new amendments to the Personal Income Tax Act have raised a number of issues that have led to public uncertainty. In this regard, it remains for us to wait for the practice that the competent authorities will establish and how they will implement the new provisions of the law.
author: Nikola Gagić