The Serbian Parliament adopted the Law on Amendments to the Law on Individual Income Tax applicable from January 1, 2020, except for the provisions regarding the exemption from the tax on earnings based on the employer performing innovative activity, which will apply starting from March 1, 2020. Income paid to entrepreneur or lump sum entrepreneur ending with March 1, 2020 will be considered to be income from self-employment, regardless of the nature of his relationship with the principal, i.e. application of the independence test is postponed till 1st of March 2020. At the same session, Parliament adopted the Law on Amendments to the Law on Mandatory Social Security Contributions.
The most significant change that has attracted a great deal of public attention in the previous period is the change to the system of lump-sum taxation of income from self-employment. Namely, the proposed changes to the law introduce a so-called test of entrepreneur's independence, according to which the legal grounds for taxation of lump-sum entrepreneur or entrepreneur shall be determined. Therefore, in accordance with the adopted legal solution, in cases where a lump-sum entrepreneur/entrepreneur is compensated on the basis of performing activities for the same employer or a related person with the employer, criteria are introduced through which the independence of the lump-sum entrepreneur/ entrepreneur will be determined. Consequently, the legal grounds of entrepreneur's income taxation shall be determined, as well.
It is expected that the IT sector, where large number of employees work as entrepreneurs under a business cooperation agreement, will be most affected by the law change. With these amendments to the law, the aim of the legislator is to suppress the work of entrepreneurs in described way by improving the system of lump-sum taxation of self-employed income and stimulating employment by introducing new employment opportunities for certain categories of individuals.
The new amendments to the law determine tax relief for an employer who engage “a qualified new employee” (the definition is given in law). The purpose of these changes is to make individuals who until December 31, 2019 preformed the business as entrepreneurs, to enter into employment, in which case the legislator prescribed a series of tax reliefs to encourage employers to establish employment with individuals who have been employed so far under a business cooperation agreement.
It should be noted that the employer can get the tax relief (exemption) if, by establishing an employment relationship with the new employee, the employer increases the number of employees compared to the number of employees as of December 31,2019. If, during the tax relief period, the employer reduces the number of employees compared to December 31, 2019, he loses the right to use the tax exemption for the number of qualified new employees - by the number of employees reduced compared to December 31, 2019., whereby in case that the tax exemption was granted to more qualified new employees, he first loses the tax exemption for the qualified new employee with whom he first founded working relationship.
The exemption is realized in the amount of 70% of calculated and withheld taxes on earnings for salaries paid in the period from January 1 to December 31, 2020; 65% of calculated and withheld taxes on earnings for salaries paid between January 1 and 31, December 2021 and 60% of the calculated and withheld taxes on earning for salaries paid between January 1 and December 31, 2022.
Regarding the prescribed benefits in terms of exemption from compulsory pension and disability insurance contributions on the basis of the earnings of a qualified newly employed person, the exemption is realized in the amount of 100% of the pension and disability insurance contributions for the earnings paid from January 1 to December 31 2020; 95% of the pension and disability insurance contributions for the earnings paid between January 1 and December 31, 2021 and 85% of the pension and disability insurance contributions for the earnings paid between January 1 and December 31, 2022.
The new amendments set forth that the compensation which entrepreneur or lump-sum entrepreneur achieve from performing activities for the same principal or related person, and who additionally fulfils at least five of the nine listed criteria (or according to circumstances it can be expected that at least five of the nice criteria will be fulfilled), is considered “another income” in the terms of the legal provisions.
Thus, the test of independence would determine whether the entrepreneur generates income from self-employment or income of an individual, i.e., determines whether the entrepreneur is independent from the principal or not. In order to “fail the test”, most of its criteria, at least five, must be fulfilled, which are aimed at checking whether an entrepreneur's job can qualify as an independent entrepreneur's job or as another type of individual engagement. These nine criteria are laid down to determine the extent to which the entrepreneur / lump-sum entrepreneur is tied to the principal, in terms of whether the principal determines his working hours, working space, vacations and absences; whether the principal provide him with the tools and equipment for work, vocational training and specialization; does at least 70% of the income of one entrepreneur / lump sum entrepreneur comes from a single principal, does the lump sum entrepreneur / entrepreneur perform activities for a fee to the same principal continuously or with interruptions of 130 or more working days over a period of 12 months, etc.
It should be emphasized that the Law specifically prescribes that a domestic or foreign legal person / entrepreneur / lump-sum entrepreneur, who directly hired a lump-sum entrepreneur or entrepreneur to carry out business, is considered to be the principal. Also, the principal will not be considered a domestic or foreign legal person / entrepreneur / lump-sum entrepreneur who is a direct payer of the compensation, but he pays such compensation in connection with the representation or mediation for the account of another person.
For all the questions regarding the application of the Law, CT Legal team is at your disposal.
As an interpretation of Article 18 of the Individual Income Tax Law, the Ministry of Finance issued an official opinion in early 2019 stating that Article 18, paragraph 1, item 1) of the Individual Income Tax Act can be applied to employee payments only when such payments can be documented with an appropriate credible accounting document, giving as an example an invoice for the purchase of a monthly subscription ticket, daily or single-ride ticket in public transport, a fuel invoice when using one's own vehicle, etc. In accordance with this opinion, new amendments to the Law are changing Article 18, paragraph 1, item 1) of the Law, so that the word documented transportation costs for arrival and departure from work is added - up to the amount of the monthly public transportation cost or up to the amount of actual transport costs, but overall up to a maximum of RSD 3,837 per month.
Regarding the reduction of the tax base for the salary, the Law regulates the tax base for a person who is employed as a newly-settled taxpayer, who establishes employment in a workplace for which there is a need for a person with special professional education and for which there is a need that cannot be easily satisfied in domestic labour market. The tax base for the salary of these persons is the base referred to in Article 15a, paragraph 2 of the Law, reduced by 70%, and the right to deduct the base is exercised for a period of 5 years from the conclusion of the employment contract. The Law also regulates the conditions for the reduction of the tax base, namely who is considered to be a qualified employer, and the newly-settled tax payer, but it is expected that the Minister in charge of financial affairs should regulate in more detail the manner of exercising these rights. The base of contributions for employees and employers, for the newly settled taxpayer, based on the earnings that allows deduction of the salary tax base realized, is the salary reduced by 70%.
Also, an Employer - a newly established company that performs some kind of innovation activity in accordance with the law can achieve the right to tax exemption from payment of income taxes of company founders within 36 months from the establishment of the company, thus stimulating entrepreneurs to set up companies.
The law also changes the provisions regarding flat-rate taxation. The amendments are referring to the conditions for flat-rate taxation, the criteria for the classification of lump-sum entrepreneurs into groups for determining the amount of lump-sum income as a tax base, establishing the starting base for determining the lump-sum income, elements that reduce or increase the starting base, as well as applying for flat-rate taxation. All this having in mind the need to create preconditions for simplifying the procedure for calculating taxes on self-employed income on a flat-rate determined income, automating the process of determining the amount of tax liability, enabling greater predictability for taxpayers, as well as reducing administration by the tax authority.