Proposal to change the tax position of entrepreneurs

On November 1 2019, the Government of the Republic of Serbia submited the proposal of Amendments to the Law on Personal Income Tax (hereinafter referred to as “the Law”) and the Law on Contributions for Compulsory Social Security to the National Assembly of the Republic of Serbia. The proposed changes foresee a significant change of the tax position of entrepreneurs.

The Government has announced that these changes will provide tax incentives for new employees from next year, so that persons employed under employment agreement during 2019 will be exempted from paying 70% of their payroll taxes and contributions during 2020, 65% in 2021 and 60% in 2022.

This measure will apply to the employment of the unemployed, whether they are persons registered with the national employment service, students and lump sum entrepreneurs.

The counter-measure to the introduced tax incentives is the introduction of the so-called Lump Entrepreneur Independence Test. According to the draft of the Law, 9 (nine) criteria for the test of independence of lump-sum entrepreneurs are introduced. If an entrepreneur fulfills 5 of the 9 criteria, the lump-sum entrepreneur will be considered not to meet the requirement of independence – implying a different way of taxation i.e. the obligation to pay taxes in accordance with the Law and the corresponding contributions as if they were persons employed under an employment agreement.

The draft of the Law provides the following criteria for assessing the independence of lump-sum entrepreneurs:

1. Principal defining working hours and/or entrepreneur is entitled to vacation leave with compensation that is approved by the principal.
2. The entrepreneur uses the premises provided or owned by the principal and/or uses material and intangible assets for the work provided by the principal.
3. Principal performs training of entrepreneur.
4. Principal advertises the positions for which he hires an entrepreneur or for that purpose he recruits agencies engaged in employment mediation.
5. Principal or a related party with the principal provides its own basic tools, equipment or other basic tangible or intangible assets necessary for the regular work of the entrepreneur or finances their procurement, or the sponsor or a related party with the sponsor normally manages the process of work of the entrepreneur or lump sum entrepreneur.
6. At least 70% of revenue in the 12 months of the entrepreneur is achieved with the principal.
7. Competition clause in the agreement with the entrepreneur.
8. Entrepreneur performs business activities of the principal and does not assume business risk towards the clients of the principal.
9. The entrepreneur has been engaged with the principal for more than 130 days in 12 months.

The new measures apply to the entire economy, but will have a significant impact on the IT industry, since a lot of IT companies cooperate with lump-sum entrepreneurs and these measures have a direct impact on the entire industry. The intention of the legislator is to control the use of the benefits of lump-sum taxation and to counter the abuse of such a model of taxation. That is, by clearly defining the status of entrepreneurs in the tax aspect, the intention is to prevent the market advantage of the entrepreneur in relation to persons employed under the employment agreement.

The implementation of the amendments of the Law is scheduled to begin on March 1st, 2020.