On 23 September 2019, the Serbian Prime Minister announced a reform of taxation of self-employed sole entrepreneurs. The new rules are supposed to become effective as of 1 January 2020. If enacted in the present form, they will affect sole entrepreneurs who are engaged on service contracts exclusively with one employer. The largest effect will be on IT industry.
Software developers and other IT professionals often register as independent sole entrepreneurs and are in the vast majority of cases granted the privileged “lump-sum taxation” status. This means that they do not pay personal income tax and social security contribution on their real income, but on a deemed income which is close to statistical average monthly wage in the area where they live. These individuals work exclusively for one IT company under a service contract, rather than under a formal employment relationship which is tax-wise more expensive. The proposed new rules will, however, apply not only to entrepreneurs who benefit from “lump sum taxation” regime but also to those who keep accounting books and pay income tax on taxable profit.
According to the unofficial draft new legislation, self-employed sole entrepreneurs will be able to keep beneficial lump-sum taxation status or, as the case may be, preferential 10% tax rate applicable to sole entrepreneurs, only if they pass “independent contractor test”. If they do not pass the test, their income from a legal entity will be taxed at the rate of 20%, plus 26% of pension and disability insurance contribution and in some cases health insurance contributions at the rate 10.3%. The independent contractor test will include the following nine criteria: whether predominant portion (70%) of income is earned from one client (including client’s related parties); whether working hours or annual and other leave depends on the client and whether the fee is the same even when the entrepreneur is on annual leave; whether the entrepreneur usually works in the client’s premises or at such other places as directed by the client or uses the client’s equipment; whether the client organises training for the entrepreneur or directs his work; whether the client engaged the entrepreneur following a recruitment process involving advertising or services of recruitment professionals; whether the entrepreneur often performs joint or team work with the other entrepreneurs under the direction of the same client; whether the entrepreneur carries out the same business activity as the client without bearing usual commercial risk associated with the work product delivered to the client’s client; whether the entrepreneur is partly or fully prohibited from providing services to other clients; and whether the period of engagement of the entrepreneur for the client reaches or exceeds 130 business days in any 12-months’ period. An entrepreneur can pass the independent contractor test only if at least 5 out of the above 9 questions are answered negatively.
There is also a carrot in the package. The draft new legislation envisages a significant reduction of tax burden for companies which take on board certain categories of qualified employees under regular employment agreement and register them with the central social security registry in the period from 1 January 2020 and until the end of 2022. Qualified employees are people who will have been unemployed during 2019 and until 30 April 2020, provided that are hired as employees from 1 May until 31 December 2020. Qualified employees are also individuals who will have been self-employed entrepreneurs during 2019, provided that they become employees in the period from 1 January until 30 April 2020. A company which hires qualified employees in the given periods and thus increases its total headcount compared to 31 December 2019, and does decrease such total headcount number until the end of 2022, will see the payroll tax cost related to those people reduced by 70% and the costs of the pension and disability insurance contributions reduced to zero in 2020. In 2021 the payroll tax for the newly-hired will be reduced by 65%, while the costs of social security contributions for those people will be slashed by 95%. Finally, for 2022, the payroll tax costs for the newly hired people will be cut by 60% and the pension and disability insurance contributions by 85%.
The incentive is also available to companies which will start operating after 1 January 2020.
To combat possible abuses, the proposed amendments provide that any subsequent decrease in the achieved headcount level will reduce the tax benefit accordingly. In order not to lose the tax benefit operating companies which start hiring new employees after 1 January 2020 must keep the achieved headcount level as of 31 December 2019 increased by the number of newly hired employees. For companies that will start operating in 2020 and will also start hiring in that year, the relevant headcount level which should not be reduced will be the one achieved as at 31 December 2020.
It is expected that the proposed legislation (official drafts approved by the government) will be sent to the parliament for approval in the course of November 2019, to become effective on 1 January 2020.