The latest amendments to the Law on Personal Income Tax in December 2019 introduced an obligation to apply and implement the so-called “independence test” for entrepreneurs.
The main purpose of the test is to confirm whether sole proprietors are indeed independent from the employers engaging them for their services or whether they are they being engaged for the sole purpose of a more favorable tax treatment, compared to that of employees. This type of engagement was especially popular in the information technology (IT) sector, which is one the most profitable and fastest growing industries in Serbia. Thus, the tax treatment of entrepreneurs has been on the government’s radar.
The amendments focus on whether the relationship has characteristics that suggest it is really one of employment. These include codependence, subordination, and hierarchy. In total, there are nine comprehensive criteria that are used to determine the appropriate tax treatment of individuals.
In addition to the provisions aimed at identifying misclassified employees, the new law cuts taxes for certain categories of qualified individuals, including former entrepreneurs, under regular employment agreements and partially excludes some from the obligation to pay regular taxes and pension and disability contributions that arise out of employment for such newly engaged employees under certain conditions. This may be seen as an incentive to implement the introduced changes, which will result in greater tax obligations in the future.
It remains to be seen how this new mechanism and control will be implemented in practice and how the IT industry and others will respond.
Written by Milena Jakšić Papac and Miloš Rubežić of Karanović & Partners and Roger James of Ogletree Deakins International LLP
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