Entrepreneur Independence Test

In December 2019, the National Assembly of the Republic of Serbia adopted amendments to the Law on Personal Income Tax ("Off. Gazette of the Republic of Serbia", No. 24/2001, 80/2002, 80/2002, 135/2004, 62/2006, 65/2006, 31/2009, 44/2009, 18/2010, 50/2011, 91/2011, 7/2012, 93/2012, 114/2012, 8/2013, 47/2013, 48/2013, 108/2013, 6/2014, 57/2014, 68/2014, 5/2015, 112/2015, 5/2016, 7/2017, 113/2017, 7/2018, 95/2018, 4/2019, 86/2019, 5/2020).

Recent changes deal with the status of entrepreneurs (preduzetnik), a special category of commercial entity most convenient for individual small businesses and freelancers. In this regard, the Entrepreneur Independence Test has been introduced as obligation and will apply starting from 1st March 2020.

The main purpose of the independence test is to prevent entrepreneurs and their clients from presenting their relationship as business cooperation while they are actually in an employment relationship, due to more favourable tax treatment applicable to entrepreneurs.

Namely, Article 85 of the Law on Personal Income Tax provides 9 criteria for determining independence. If the entrepreneur fulfils at least 5 of them, they will be considered in an actual employment relationship and subject to employee income tax rules. Those criteria are:

Client determines working hours, vacation and other leaves for the entrepreneur, while the entrepreneur’s fee does not get proportionally reduced for time spent on vacation;
The entrepreneur normally uses premises provided by the client or performs business activities in a place designated by the client;
Client conducts or organizes professional training or usually manages the entrepreneur’s work process;
Client hired the entrepreneur after publicly advertising the position or via recruitment services;
Client provides basic tools, equipment or other essential assets necessary for the entrepreneur’s regular work;
At least 70% of the entrepreneur’s income over 12 months comes from a single client;
Entrepreneur carries out activities that are part of the client’s business, without bearing usual business risks for delivery;
The entrepreneur’s contract prohibits or limits them from working for other clients;
Entrepreneur performs activities for the same client 130 or more business days over 12 months.

If at least 5 criteria are met, income is taxed as other income (20% rate, no cost deductions), plus mandatory pension and disability insurance contributions (PDI).

Contrary to this, entrepreneurs excluded from the VAT system (annual income up to 6 million RSD ≈ 50,000 EUR) are subject to a monthly lump-sum tax of about 100–200 EUR depending on region.

Responsibility

Who bears responsibility if the entrepreneur is found fictitious?

Taxes and contributions for PDI will be withheld by the client (employer). The client is ultimately responsible for payment.

If the tax authority determines fictitiousness during control, the client must pay all due taxes and contributions, plus interest (National Bank of Serbia reference rate + 10 percentage points). Additionally, the client may face misdemeanour or criminal liability for non-payment.

If income is from a foreign entity, the entrepreneur themselves must calculate and pay the taxes and contributions.

Tax Reliefs and Incentives

The legislator also introduced incentives for companies to employ their "fictitious entrepreneurs." Starting 1 January 2020, companies can claim tax credits for 3 years if:

They increase their number of employees;
They hire persons unemployed between 1 January 2019 and 30 April 2020, provided employment is by end of 2020;
They hire entrepreneurs who were not employed during 2019, provided employment is by April 2020.

Tax exemptions for payroll taxes and PDI contributions apply as follows:

70% exemption in 2020
65% exemption in 2021
60% exemption in 2022

Finally, the new amendments to the Personal Income Tax Act have raised uncertainty. It remains to be seen how authorities will interpret and implement these provisions.