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:
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.
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