Government of the Republic of Serbia decided to promote employment of young people entering the labor market. Thus, it decided to present amendments to the Law on Citizen Income Tax in order to prevent further engagement of employees in line with the entrepreneurial model.
A package of measures was also announced that will allow tax benefits to companies planning to hire young workforce. Whether an entrepreneur is truly independent in its operations or there is a fake independency at play will be proven by an Independency test introduced with law amendments. All entrepreneurs that are independent in their work that do business with a number of clients have no reasons for concern, they will not feel the change. What will it all look like in practice?
Calculation in practice
If a developer was making net salary of EUR 1500 and was paying the costs of keeping a flat-rate tax paying agency, this means that such developer was making RSD 180,000. In this case, for salary, the employer must, in line with the current model, pay additional 67% for contributions, that is, another RSD 120,600.
Proposed law amendments and tax relief in this example of a company would mean significant savings, since if a company hires a flat-rate taxpayer as it recently may have done, then, in the first year, it would pay benefits in the amount of RSD 36,180.
The Government presented amendments to the Law on Citizen Income Tax and Law on Contributions for Mandatory Social Insurance. All companies hiring flat-rate taxpayers qualify for 70% relief. These amendments shall come into effect as of 01 January 2020.
In this way the Government wishes to promote the employment of young workforce entering the labor market from the tax perspective, and to encourage entrepreneurs flat-rate taxpayers to increase the number of employees.
New amendments introduce the Independency Test, that is, a new category for taxation by which an entrepreneur or a company may verify and qualify it as income from independent activity or income of a natural person.
What does it mean further on?
Full employment to a flat-rate tax paying agency will be impossible, and consultancy work will be invoiced as per recent model, for example.
This means that designers, developers and other individuals that cooperate with only a few clients and that have flat-rate tax paying agencies will continue to operate without any issues. Companies that employed workers on full-time basis and paid their salaries through flat-rate tax agencies will not be able to operate like that. There is a new option for them from the beginning of next year, which is, to hire employees that were paid through flat-rate agencies as full-time employees with tax benefits.
Thus, employers will be released from paying 70% of salary taxes, and during the entire 2020 they will not be obligated to pay Pension and Disability Fund contributions for new employees. During 2021 and 2022, in most part, the situation will be the same provided the company increases the number of employees.
Proposed amendments and tax relief include promotion of employment of the youth, and duties the company would pay for previously engaged flat-rate taxpayer in the first year would not be a significant impact to the company budget, and in many cases, contributions will be significantly lower at start.