New Lump-Sum Taxation of Entrepreneurs and Impact on 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 Personal Income Tax Law (PIT law) 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 lump-sum 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 “Independent Contractor Test”, which would also start to apply as of January 1, 2020. The Independent Contractor Test would help to determine whether a particular entrepreneur fulfills the conditions for the lump-sum 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 with regard to that.

Independent Contractor Test Criteria

(1) client (including client’s related parties) determines working hours, vacation and other leaves for the entrepreneur (or a lump-sum entrepreneur), while the entrepreneur’s (or a lump-sum entrepreneur) fee does not get proportionally reduced for the time spent on vacation;

(2) entrepreneur (or a lump-sum entrepreneur) customarily uses premises provided by client (including client’s related parties) to carry out business activities, or client (including client’s related parties) provides or finances their material, tools, equipment or other tangible or intangible assets needed to carry out business activities;

(3) client (including client’s related parties) conducts or organizes professional training or development training, or usually manages the entrepreneur’s (or a lump-sum entrepreneur) work process;

(4) client (including client’s related parties) hired the entrepreneur (or a lump-sum entrepreneur) after publicly advertising the position for natural persons, or through third party recruitment services, which resulted in hiring that entrepreneur (or a lump-sum entrepreneur);

(5) entrepreneur (or a lump-sum entrepreneur) frequently works in a team with other entrepreneurs (or lump-sum entrepreneurs) who are hired by the same client (including client’s related parties) or their employees;

(6) at least 70% of the entrepreneur’s (or a lump-sum entrepreneur) total income over a 12-month period comes from a single client (including client’s related parties);

(7) entrepreneur (or a lump-sum entrepreneur) carries out activities which are part of client’s (including client’s related parties) business, while the contract for such activities does not stipulate a clause under which entrepreneur (or a lump-sum entrepreneur) bears the usual business risk for the job delivered to client’s (including client’s related parties) client, if such clients exist;

(8) entrepreneur or lump-sum entrepreneur’s service agreement contains a clause that partially or fully prohibits entrepreneur (or a lump-sum entrepreneur) from providing services to other clients;

(9) entrepreneur (or a lump-sum entrepreneur) performs paid business activities for the same client (including client’s related parties) continuously or intermittently for 130 or more business days over a 12-month period.

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 lump-sum taxed 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?

* Please note that after the publication of this news, several criteria of the Independent Contractor Test have been changed, as well as that the proposal of the Draft Law has entered the parliamentary procedure. You can read more about this, as well as about the new Independent Contractor Test criteria in our news post “Changes to the Independent Contractor Test and Two More Months of Grace Period”.

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