Draft Amendments to the Law on Personal Income Tax

Test of Entrepreneurs’ Independence and Other Novelties incorporated in the Draft Law on Amendments to the Law on Personal Income Tax

In order to proceed with economic reform, suppress the “grey economy”, create conditions for more efficient suppression of illegal work of natural persons, as well as stimulate employment and economic growth, the Government of the Republic of Serbia proposed amendments to the current Law on Personal Income Tax (hereinafter: LPIT) which should be adopted by the end of this year. These amendments bring many novelties to our legal system and the most important ones are related to the system of flat-rate taxation of self-employed income, increase of non-taxable amount of earnings and introduction of new employment benefits for certain categories of persons.

1) Changes to the system of flat-rate taxation of self-employed income

The most significant change that has attracted a lot of public attention in the previous period is the announced change to the system of flat-rate taxation of self-employed income. Namely, the announced changes to the law introduce a so-called test of entrepreneur’s independence, according to which the basis on which the income of entrepreneurs / lump-sum entrepreneurs will be taxed will be determined, given the fact that employers often hire flat-rate entrepreneurs. Therefore, in accordance with the proposed legal solution, in cases where an entrepreneur /lump-sum entrepreneur is remunerated on the basis of carrying out activities with a remuneration by the same employer or an employer’s affiliate, criteria for determination of the level of independence of the entrepreneur / lump-sum entrepreneur is introduced. Accordingly, these criteria enable establishing the basis on which entrepreneur’s renumeration will be taxed. The criteria mentioned in the draft law are as follows:

1. the employer / employer’s affiliate determines the working hours of the entrepreneur /lump-sum entrepreneur and the employer / employer’s affiliate determines when the entrepreneur will take a vacation;
2. the entrepreneur / lump-sum entrepreneur uses premises and equipment of the employer / employer’s affiliate for work;
3. the employer / employer’s affiliate organizes vocational training for the entrepreneur / lump-sum entrepreneur;
4. the employer / employer’s affiliate has hired an entrepreneur / lump-sum entrepreneur by the usage of an advertised job vacancy or through an intermediary (e.g. employment agency);
5. the entrepreneur / lump-sum entrepreneur frequently carries out his work in cooperation with other entrepreneurs hired by the same employer / employer’s affiliate;
6. the entrepreneur / lump-sum entrepreneur earns a predominant level of income over a 12-month period from one employer / employer’s affiliate;
7. the entrepreneur / lump-sum entrepreneur performs activities in the field of the employer’s / employer’s affiliate’s business, and for such activities his hiring contract does not contain a clause under which the entrepreneur / lump-sum entrepreneur bears the usual business risk for the job delivered to the employer’s / employer’s affiliate’s client;
8. the entrepreneur’s / lump sum entrepreneur’s hiring contact contains a partial or complete prohibition on the entrepreneur / lump-sum entrepreneur to provide contractual services to other employers; and
9. the entrepreneur / lump-sum entrepreneur carries out remunerated activities for the same employer / employer’s affiliate, continuously or intermittently for 130 or more workdays over a period of 12 months.

According to the draft law, if it turns out that the entrepreneur fulfils most of the criteria, or at least five of the nine, then the entrepreneur in this case will pay the tax according to the rules for other income, i.e. in the amount of 20%. For clarification, the draft law explicitly states that the term “other income” means a remuneration received by an entrepreneur / lump-sum entrepreneur on the basis of carrying out activities with remuneration for the same employer (or employer’s affiliate),and such entrepreneur / lump-sum entrepreneur fulfils at least five of the nine criteria (from the abovementioned test of independence), or, as the case may be, at least five of the nine criteria can be expected to be fulfilled when starting business cooperation with the employer. Namely, by introducing such legal solution, the legislator has opted to tax the income of these entrepreneurs / lump-sum entrepreneurs through “other income”, where the rate of 20% applies, as opposed to the situation when the employee’s income is taxed through earnings where the rate is 10%. If, however, the entrepreneur does not meet five of the above nine criteria, then the general taxation regime applies.

It should be pointed out that mentioned tax regime is a heavy tax burden because the income of “non-independent” entrepreneurs / lump-sum entrepreneurs will be double taxed first through a lump-sum or self-tax system (depending on the regime which applies to the entrepreneur), and for the second time through withholding tax, with the possibility that a third taxation may occur through the system of annual personal income tax if an entrepreneur falls within that category of taxpayers.

2) Increase in non-taxable amount of earnings

One of the significant novelties expected to be introduced by the draft Law on Amendments to the LPIT is the increase of the non-taxable amount of earnings. If the proposed changes are to be adopted, the non-taxable amount of earnings will be RSD 16,300.00 per month compared to the previous RSD 15,300.00. This will reduce the income tax base and therefore the amount of tax.

3) Employment stimulation

Lastly, the proposed changes are intended to stimulate employment. In this context, employers are expected to get benefits in the following cases:

(a) employers representing newly established companies engaged in innovation will get benefits since the proposed changes prescribe exemption from payment of income taxes of founders who are employed in their own newly created companies engaged in innovation, and

(b) employers who employ a qualified newly employed person will get benefits since the proposed changes prescribe exemption from payment of income taxes of a qualified newly employed person.

In addition, a reduction of the income tax base for persons who get employed and are considered as newly “born” taxpayers in the territory of the Republic of Serbia is proposed. The income tax base in this case is reduced by as much as 70%. This change is intended to motivate natural persons living abroad and whose work, due to their special education, requires domestic employers to settle in Serbia and get employed by a domestic employer.

In the end, the new changes would bring an increase in the non-taxable amount of scholarships and loans for students up to RSD 30,000 per month.

If you have any questions or need further information please contact Nataša Sarić, Associate at natasa.saric@zslaw.rs or any of your regular contacts at Živković Samardžić.