The first day of March 2020 marked an official start of the application of the Independent Contractor Test – a particular test with the main purpose to assess the level of independence of the entrepreneur in his relationship to the client. This method has been created to distinguish those business entities that are officially entrepreneurs but are de facto employees – and their income will be taxed as “other revenue” in accordance with the Personal Income Tax Law (hereinafter referred to as the Law).
The Law introduces and elaborates on the test itself; the test applies to entrepreneurs from various business areas, and there is no doubt that its role is of remarkable importance when it comes to the IT industry, taking into account the significant increase in work expenses caused by the implementation of the test. A logical consequence of the change in the tax treatment of entrepreneurs in the IT sector is business aggravation and, therefore, the expected decrease of employees’ salaries, which may all together affect the outflow of IT experts from Serbia. The Independent contractor test, as well as its consequences, have previously been introduced in our news post Changes to the Independent Contractor Test and Two More Months of Grace Period .
Simultaneously with the introduction of the Independent contractor test , the Law prescribed a certain tax relief, which should motivate the employers to establish an employment relationship with the entrepreneurs unable to “pass” the test. Namely, an employer who hires a qualified newly employed individual before April 30, 2020, will be exempt from paying salary taxes and contributions for that employee.
Article 21ž of the Law defines the qualified newly employed person: a person who did not have a status of an insured employee ie, of a self-employed insured person who is a founder or a member of a company, who is employed by a company they founded or were a member of in the period from January 1, through December 31, 2019, and who acquired that status in the period from January 1 through April 30, 2020, by establishing an employment relationship with an employer.
Additionally, the qualified newly employed person is an individual who did not have a status of an insured employee ie, of a self-employed insured person who is a founder or a member of a company, who is employed by a company of which he is a founder or a member within the period from January 1, through April 30, 2020, and who acquired that status within the period from May 1, through December 31, 2020, by establishing an employment relationship with an employer.
What is the result? Entering into an employment relationship with entrepreneurs becomes more attractive and is more simplified for the employer. Namely, the employer who establishes the employment relationship with an entrepreneur will be exempt from the following:
- 70% of the income tax paid in 2020;
- 65% of the income tax paid in 2021;
- 60% of the income tax paid in 2022;
- 100% of the contributions for the mandatory pension and disability insurance for the salaries paid in 2020;
- 95% of the contributions for the mandatory pension and disability insurance for the salaries paid in 2021;
- 85% of the contributions for the mandatory pension and disability insurance for the salaries paid in 2022.
Therefore, if the lump-sum taxed entrepreneur concludes the employment agreement with their client, the client will obtain the right to significant tax relief in the following three years.
Furthermore, the importance of this benefit reflects in creating a counterbalance to possible difficulties in the business activities of business entities that fail to comply with the Independent contractor test.
However, the declaration of the state of emergency in the Republic of Serbia caused the need to modify a number of regulations to the new circumstances. One of the most recent amendments is the one from the Decree on postponing the deadline for acquiring the status of a qualified newly employed person (hereinafter referred to as Decree), which entered into force on April 24, 2020. According to its title, Decree extends the deadline for the acquisition of the state of a qualified newly employed person, hence it is postponed from April 30th to a period of 60 days from the date of termination of the state of emergency .
By extending the above-mentioned deadline, lump-sum taxed entrepreneurs earned the additional time to legally establish the regular employment relationship and therefore prevent the tax inspection penalties, which may be a threat in case the entrepreneur fails to fulfill the requirements set in the Independent contractor test. In this case, the additional time may represent a second chance for all those who missed their opportunity to enter into the employment agreement by April 30, and a motive to reconsider their decision.
Bearing in mind that the state of emergency is approaching its end, the 60-day deadline will soon begin to run. If you haven’t already, this is an ideal opportunity to ask yourself once again: are you eligible to pass the Independent contractor test? In case your answer is highly uncertain, you should consider establishing the employment relationship with your client or consider completely reorganizing your business relationship.
