Independence test for Entrepreneur (contractors) in Serbia

Pursuant to Article 85, paragraph 1, item 17 of the Law on Individual Income Tax, the compensation paid to contractors who performs activities for compensation to the Client or to a person who is considered to be a related person with a Client, within the meaning of the law, and additionally fulfills at least 5 of the 9 criteria listed below will be taxed as other income in accordance with the the Law.

In case that contractor fulfills 5 or more of the following criteria in his or her business relationship with the Company, the Company will be obliged to charge tax at the rate of 20% and contributions at the rate of 25.5% on the gross amount of compensation paid to the lender or contractor. (ie 83% to net amount – invoice amount) in accordance with the Law on Individual Income Tax or the Law on Law on Contributions for Compulsory Social Security.

Contractors who do not pass the independence test have a deadline of April, 30 of 2020 to become employed, in order to become qualified employees for whom company can use tax incentives (tax exemption) for a 3 years period. However, in view of the transitional provisions, contractor’s liabilities should be paid by March 1st, 2020, so that the Company does not bear the significant risk of additional taxation. That practically means, paying February invoices in February and make the employment contract with them starting from March.

According to unofficial information from the Ministry of Finance contacts, contractors’ income will not be retroactively checked in the case of tax controls for the periods ending December 31, 2019, however, if the Company retains the same business model, the tax administration may, in accordance with the principle of fact, extend the control and to earlier periods.

Companies who have engaged contractors so far, should consider facts and contractual terms to see whether criteria will be fulfilled or not.

Also, both parties should be aware about risk that may arise, as well as possibilites and circumstances (change in total expanditures for company and net income for individuals) if contractual relationship would be changed to employment contracts or some other options.

The criteria prescribed by the new Law on Individual Income Tax:

1. Client (or related party – regarding these criterias raletad party is always consider same as a Client itself) determines the working hours of contractor, vacations and absences of contractors are dependent on the decision of the Client and the compensation to the contractor is not reduced in proportion to the time spent on vacation;
2. Contractor usually uses premises provided by Client or performing tasks in a place designated by the Client for the purpose of performing the tasks entrusted to him;
3. Client performs or organizes professional training or further training of contractors;
4. Client hired contractor after advertising in the media the need to engage individuals or hiring a third party who is usually engaged in finding suitable people for employment and whose service resulted in the engagement of particular contractor;
5. Client provides its own basic tools, equipment or other basic material or intangible assets needed for the regular work of the contractor or finances their acquisition, except for specialized tools, equipment or other specialized tangible or intangible assets for the purpose of executing a specific job or order, either the Client usally manages the process of work of contractor, except for such management which entails giving a basic order in connection with the ordered job and reasonable control of the results of work or supervision of the Client, as a good businessman, over the performance of the work he has commissioned;
6. At least 70% of the total income of the contractor in the period of 12 months beginning or ending in the tax year concerned is from a single Client or a related party with the Client;
7. Contractor performs activities from the scope of business activities of the Client, and for such performed activities his engagement contract does not contain a clause under which bears the usual business risk for the job delivered to the Client;
8. The contract with contractors contains a partial or complete ban to provide services under a contract with others, except for a partial ban which includes the provision of services to a limited number of Client’s direct competitors;
9. Contractor performs activities for a fee for the Client, continuously or intermittently for 130 or more working days for a period of 12 months beginning or ending in the respective tax year, whereby performing activities in considers one working day to be an activity in any period during that working day between 00 and 24 hours.

AKTIVA sistem can help you with overview of possibilities and calculation of the financial impact of the options which are lie ahead company and contractors.