What can lump-sum taxpayers who fail the independence test expect? – Amendments to the Law might have a negative impact on the local IT sector

The Government of Serbia has announced law amendments which will implement an independence test for entrepreneurs, whereby it will be determined whether the entrepreneur is independent of the company hiring them and whether they are eligible for lump-sum taxation or need to be employed by the company. The amendments have caused a public debate, primarily in the IT community, which seems to be the most affected by these changes.

The independence test will contain nine criteria checking the independence of the entrepreneur related to the employer.

Aleksandar Vasic, a tax consultant and the president of the Group for Accounting Services at the Chamber of Commerce of Serbia, says for eKapija that the amendments are necessary, but that he is not sure that the proposed solutions are the best.

– State representatives tend to believe that it is companies that are trying to cut corners by hiring lump-sum taxpayers, which is not true. In the past years, the trend has been that entrepreneurs condition employers to sign commercial agreements, and not labor contracts with them, seeking “greater independence”. On the other hand, the state has been promoting entrepreneurial initiative for years. By founding an enterprise, one has greater independence and gets new opportunities. Serbia is not a place where the entrepreneurial spirit has taken root. That needs to be our goal if we want a stable economy and a positive change in people's relation to business operations. The new rules send a different message, which is bad – Vasic says.

Who needs to take the independence test?

The independence test aims to check the relation between the client and the entrepreneur. Both sides are responsible, but, in case the test is failed, who suffers the consequences depends on who the cooperation is realized with, as Sofija Popara, the founder of the Pausal.rs portal, a member of the task force with the NALED for changes and automation of taxation, says for eKapija.

– As they've announced, if you meet 5 of 9 criteria, you have failed the test. What remains disputable are the criteria, which are too wide and not well defined and can be interpreted differently, which can lead to problems. The Tax Administration will not directly influence the testing, but can dispute the results during the control process and retroactively tax all your income. If the criteria are not well defined, entrepreneurs take a big risk and depend on the subjective opinion of a tax inspector – Popara says.

In the situations when the entrepreneur cooperates with several legal entities, they need to take a test for each of these relations.

– Each entrepreneur or a legal entity which cooperates with an entrepreneur should check the answers to the questions in the test and draw a conclusion as to whether they will fail it or not, regardless of the number of clients the entrepreneur cooperates with – Popara says.

Foreign clients

In the case of an entrepreneur that pays lump-sum tax cooperating with foreign clients, the situation is even more complicated.

– If the entrepreneur works with a foreign client, the entrepreneur suffers the consequences and is subject to having its income taxed as a natural person. If the client is a local person, they take the consequences – Popara emphasizes.

This means that, for entrepreneurs which fail the test, the income realized through the client in question is treated as personal income and is taxed as such, regardless of the taxes and contributions they already pay as an entrepreneur.

– Considering that the previous solution doesn't pay off, the alternative could be to open a LLC through which to operate, instead of operating as an entrepreneur, as LLCs are not subject to this test. However, in addition to being a much more complicated form of doing business, compared to entrepreneurs which pay lump-sum tax, it is also more expensive, starting with bookkeeping expenses – Popara says and adds that no solution is apparent at the moment that would not negatively impact the business operations.

Vasic agrees with her and points out that special attention needs to be paid to the IT sector and entrepreneurs who cooperate with foreign clients.

– We need to keep in mind the IT sector and entrepreneurs who work with foreign companies. This is a pure net income for the state, and if the intention is to take away half of that for taxes and contributions, it will not “pass” in the long term. This type of an entrepreneur is the most adaptable one and the least dependent on the workplace. They have no language barrier problems and can look for opportunities in other countries. There's nothing better for the state than to have programmers from other European states come here to found enterprises. They pay taxes, while barely expecting anything from the state, they spend money here and each spending is taxable too – Vasic says.

He adds that it's important to understand the specific characteristics of business operations, especially changes in certain fields, which are so intensive that the laws should be more liberal so as not to hamper the market activities.

– The changes in IT and some other professional services are so intensive that the bureaucratic mentality can only hamper them – Vasic believes.

Effects of new measures

Although our interviewees agree that certain amendments to the Law are needed, they are skeptical toward the effects of the new measures.

– Although we do need to understand that the budget has its appetites too, the most important thing is for the state to learn how to treat taxpayers well, as they are the best investment in the long term. The point of taxation is not to harm the taxpayer, but to help them develop. The proposed solutions will have a short-term effect of increased tax collection, as the majority of entrepreneurs will not want to go against the law, but I do believe that this will have negative effects in the long term – Vasic says.

– The idea behind the amendments is to reduce the abuse of the lump-sum taxation system, which certainly needs to be done, but we must also be aware of who the unintended victims are. Also, these measures do not address the other form of abuse of the lump-sum taxation system – in addition to the simulation of employment, it is also used for money laundering, and this kind of a move can only exacerbate that – Popara says.

Ivana Milovanovic

Privredna komora Srbije

Poslovni savetnik doo

Vlada Republike Srbije

Poreska uprava Srbije

paušal rs

Aleksandar Vasić

Sofija Popara

Law on Contributions

independence test

Law on Personal Tax Income

Law on Contributions for Mandatory Social Insurance

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