Changes to Flat-rate Taxation and Impact To the IT Sector

The wait is finally over! The long announced legal amendments have finally been officially confirmed. On September 23, 2019, the Government of the Republic of Serbia and the Ministry of Finance announced that the adoption of the amendments of the Law on personal income tax and the Law on compulsory social security contributions is planned to take place by the end of the year. In the upcoming weeks, draft amendments to the law will be placed up for a debate before the National Parliament of the Republic of Serbia. The novelties should take effect starting from January 1, 2020.

Taking into the account the intended tax incentives, the purpose of the legal amendments is to stimulate employment in companies that are increasing the number of their employees, as well as to more precisely regulate the engagement of the flat-rate taxed entrepreneurs, which we will cover in more detail in the news post.

It is intended that the companies will be entitled to use the tax incentives in accordance with the following:

  • The tax incentives can be used in the period of the forthcoming 3 years, starting from January 1, 2020;
  • If the companies increase the number of their employees;
  • If the companies hire employees who were not employed in the period between January 1, 2019, and April 30, 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.

In light of the above, the companies will not be obliged to pay about 70% of the income taxes and the contributions for the pension and disability insurance for those employees in full amount in 2020, while in the following couple of years the companies will not have the obligation to pay the most of these expenses for those people. We are talking about the reduction of about 65% in 2021, and about 60% in 2022. In addition to the effect that these incentives have on the Serbian economy, their purpose and application in the following three-year period should also provide the opportunity and time for the companies to adapt to the new regulations.

Moreover, it is planned that the amendment of the Law on personal income tax introduces the so-called “the entrepreneur’s independence test”, which would also start to apply as of January 1, 2020. The independence test would help to determine whether a particular entrepreneur fulfills the conditions for the flat-rate taxation, by answering the questions contained in the test. To put it in another way, it would be used to ascertain whether a particular person is really an entrepreneur who receives income by performing an independent activity, or that person is, in fact, an employee. In the case of the latter, the company can hire that person by concluding the employment agreement with that person and use the tax incentives in regard to that.

Even though the legal novelties’ reach beyond the IT industry, we can notice that the very IT industry will face the biggest impact of the proposed amendments, with a large number of flat-rate tax entrepreneurs, as well as the companies which have so far been de facto employing those entrepreneurs. That is since the amendments will prevent them from continuing with that manner of cooperation, with the increase of expenses for both sides. Instead, they will be provided with the opportunity to hire the above-mentioned entrepreneurs, thus enabling them to use the tax incentives.

With all of this in mind, the legal amendments give rise to many questions and uncertainties, and thus a certain degree of fear and uncertainty in the IT sector:

  • Is the prescribed transitional period long enough?
  • How to bear paying the tax and the compulsory social security contributions in the full amount after the expiry of the tax incentives?
  • How will the IT industry react?

In the upcoming period, it is expected that the proponents of the legal amendments will reveal more details on this matter, as well as the very proposal of the legal amendments which would be the object of the parliament’s consideration. At that point, we would, hopefully, get the answers to these and other questions.

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