Tax Alert, November 2019
Draft of the Law on changes and amendments to the Law on Personal Income Tax
We hereby wish to inform you that the draft Law on changes and amendments to the Law on Personal Income Tax (the Law) is currently in procedure for adoption in National Assembly of the Republic of Serbia, and it is proposed to enter into force 8 days from publishing in the Official Gazette RS.
Changes and amendments will be discussed in more detail in the text below. For any questions regarding the implementation of the changes and amendments to the Law, you may contact Tatjana Milenkovic, Director in the tax department on the following email address email@example.com.
Key proposals refer to:
· Introducing test of independence for entrepreneurs
· Tax relief for qualified newly employed individuals;
· Tax exemption for digital nomads income;
· Introducing special rules for taxation of repatriates and new immigrants income
· Tax relief for newly founded companies which perform innovation activities and their founders
· Defining acquisition price for the purpose of determining the capital gains;
Amendments to the Law on Personal Income Tax
1. Taxation of entrepreneurs income – independence test
Amendments to Article 85, in particular the newly added item 17, prescribe that income of the entrepreneur or lump-sum entrepreneur is considered to be other income when realized on the basis of performing activities for a fee from the same principal, or a related person with the principal, and if s/he fulfills 5 out of the 9 criteria prescribed by this Article (which determine his/hers dependence from the principal). Criteria determined in the draft of the Law which is presented before the National Assembly differ, to some extent, from the criteria which were published on the Ministry of Finance website.
Such fee would be taxed in full, without the possibility of deducting standardized costs, and with the tax rate of 20%.
The criteria applies on determining:
· Who decides on working hours, vacations, absence of entrepreneurs and whether or not the compensation for absence or vacations is reduced from the total fee;
· Whether the entrepreneur usually uses the principal's premises to perform assigned tasks,
· Whether the principal organizes professional training and development of the entrepreneurs;
· Whether the principal has hired an entrepreneur after advertising the job position publicly or through services of a head-hunting agency;
· Whether the principal provides material, tools, equipment or other tangible or intangible assets (excluding specialized assets) or the principal manages the work process of the entrepreneur except for such management that is usual for any business relation;
· At least 70% of the total revenue generated over a 12-month period is from one principal;
· The entrepreneur performs activities which are part of principal’s business activity and the contract does not contain a clause defining that the entrepreneur bears the usual business risk;
· The contract contains a partial or complete ban for the entrepreneur to perform services under the contract with other clients, except in the case of a partial ban on the provision of services to the principal’s direct competitors;
· The entrepreneur carries out activities for which s/he receives a fee for the same principal continuously or intermittently for 130 or more working days for a period of 12 months beginning and ending in the respective tax year.
The income defined in this Article shall not be included in the income from self-employment, which is generated by the taxpayer on the actual income from self-employment.
In addition, transitional provisions state that the fee paid out to the entrepreneur or lump-sum entrepreneur until and including March 1 2020 will be considered as income from independent activities regardless of the relationship nature between the entrepreneur and the principal (determined either via independence test or substance over form principle).
2. Tax relief for the qualified new employees
The new Article 21ž stipulates that an employer who establishes an employment relationship with a qualified new employee is entitled to exemption from paying calculated and withheld salary tax for the salary paid as until December 31, 2022.
Qualified new employee is considered to be a person who was not insured as an employee in 2019 (meaning also persons which were insured as entrepreneurs) and who acquires the status of an insured employee in the period from 1 January to 30 April 2020.
It is envisaged that the tax deduction will be applied as follows:
· 70% of payroll taxes paid between January 1 and December 31, 2020;
· 65% of payroll taxes paid between January 1 and December 31, 2021;
· 60% of payroll taxes paid between January 1 and December 31, 2022;
This Article will be of great importance for the entrepreneurs that do not fulfill criteria prescribed in the Article 85 paragraph 1 point 17 and are not considered to be independent, but choose to enter into employment relationship as of 1 January 2020.
3. Tax exemption for digital nomads income
The new Article 9b specifies an exemption from taxation of the income of a non-resident taxpayer who spends less than 90 days in Serbia in 12 months beginning or ending in the respective tax year if that income is derived from a non-resident principal who does not perform the business activity or other activity in the territory of Serbia.
The exemption shall also apply to income derived from a non-resident principal who performs an activity in the territory of Serbia, provided that the service provided to a non-resident legal entity does not serve its business activity in the territory of Serbia.
4. Tax base for repatriates and new immigrants
The new Article 15v is added to define the salary tax base for the repatriates and new immigrant taxpayer (hereinafter taxpayer).
The taxpayer is entitled to a 70% salary tax base deduction if s/he meets certain conditions.
Article 15v further defines:
· who is considered to be a repatriated and new immigrant,
· the amount of deduction that can be used,
· what conditions s/he has to meet to apply the deduction and for which period.
This provision is intended for repatriates.
5. Tax relief for newly-established companies
The new Article 21e prescribes that a company, a newly established legal entity carrying out an innovative business activity within the meaning of the Law on Corporate Income Tax, registered with the business register, is entitled to exemption from paying calculated and withheld salary tax on the founders salary.
The tax exemption applies up to the amount of 150,000 RSD for the employee-founder, for a period of 36 months from the day the company was founded.
Article 21e also further specifies the additional conditions that must be fulfilled for this tax exemption to be applicable.
6. Acquisition price for capital gain purposes
Amendments to Article 74, paragraph 8, more precisely define the acquisition price of shares, acquired from the employer or the employer’s related entity, free of charge or at a preferential price. In particular, if these shares are subject to salary tax, the acquisition price will be the sum of the documented preferential price and the basis on which the salary tax has been paid.
The acquisition price of shares or stocks in non-resident companies, in the case of remunerated transfers, will be the market value on the day when the person making the transfer became a tax resident of Serbia.
7. Other provisions
It is explicitly stated that only documented public transportation cost reimbursement will be exempted from salary tax.