Entrepreneur independence test – practical dilemmas and concerns
With the last Amendments to the Income Tax Law, at the end of 2019, new rules have been introduced that aim to test whether the relationship between an entrepreneur and principal can be considered independent.
The main intention of the legislator was to prevent in this way the increasingly common practice that natural persons, instead of concluding a contract with employers, decide to register as entrepreneurs and in this way they provide services to the aforementioned employers (ie the principle).
It is also important to emphasize that the tax authorities of the Republic of Serbia have so far had the right to challenge the above practice by applying the so-called “principle of fact” according to which transactions can be viewed in accordance with their economic substance. However, the introduction of the so-called “independence test” is, first and foremost, an attempt to reduce the possible risk of arbitrary interpretation and application of the principle of factuality by the tax authorities of the Republic of Serbia by applying more precise rules.
The independence test consists of nine criteria through which the contractual relationship between the entrepreneur and the principal must be considered. If the entrepreneur fulfills at least 5 of the 9 criteria, he will be considered to be independent of the principal and the entrepreneur’s compensation will be taxed at the rate of 20% with additional calculation of the corresponding contributions.
However, with the introduction of the independence test, new questions and dilemmas have been raised regarding the interpretation of the criteria in the test. Some of these common dilemmas that have been addressed to our office so far will be addressed in the following section:
1. Who is legally obliged and responsible for conducting the “independence test”?
Each entrepreneur should, together with their principal from Serbia, conduct a “test of independence”, since if the entrepreneur was not considered to be independent in relation to the principal, it was the principal who would have to pay taxes and contributions on behalf of the entrepreneur.
If an entrepreneur cooperates with a foreign client, he or she must carry out an “independence test” since, in the event that independence is established, it is the entrepreneur who would have to pay taxes and any contributions through “self-taxation”.
2. By what time should the “independence test” be conducted?
Since the introduction of the “independence test” is prescribed from 1. March 2020, this means that by that time entrepreneurs will have to determine whether they are independent of the originator.
3. If a person, in accordance with the established “independence test”, is not considered independent in relation to the principal, by which time can he harmonize his business according to the law?
If an entrepreneur finds that he or she cannot be considered independent of the originator, he or she should by 1 March, 2020, reconcile his / her business. Failure to do so risks the tax inspector, in the case of tax control, to determine the existence of irregularities, which will have further consequences in terms of higher tax expenditures and contributions.
In addition, persons who already operate as entrepreneurs and wish to benefit from the prescribed tax and contribution benefits have until 30 April, 2020, to reconcile their businesses.
4. Will an entrepreneur be considered to be self-employed if the principal assigns working hours to the entrepreneur while the entrepreneur’s remuneration is reduced in proportion to the time he spends on vacation?
In this case, the criterion can be considered fulfilled since the principal determines the working hours of the entrepreneur. The fact that the entrepreneur’s remuneration is reduced by the time he spends on vacation will not mean that the criterion in question will not be met.
5. Will an entrepreneur be considered independent if his remuneration is fixed at a fixed amount and is not reduced during the entrepreneur’s (vacation) absence?
If the remuneration of the entrepreneur is fixed at a fixed amount and if it is not reduced during his absence, this can be a strong indicator of the entrepreneur’s independence in relation to the principal.
However, in interpreting this criterion, the way in which the compensation of entrepreneurs is contracted may also be relevant.
Namely, it is not unusual for the provision of certain types of services to determine the compensation in a lump sum (fixed) amount for a certain number of hours or days during which the entrepreneur will potentially be available to the client. In other words, it is possible that an entrepreneur will be absent (on vacation) one part of the month while in the second part of the same month he will work and earn the stipulated (contracted) compensation. If the entrepreneur invoices the client once a month, his remuneration for the month in which he was absent will be the same as for the other months.
In addition, one of the features of the IT sector is the flexibility of business. That is, an IT entrepreneur can usually do his / her work assignments from anywhere in the world at any time. In this sense, entrepreneurs operating in the IT sector have the opportunity to carry out their work tasks, and to receive compensation, even during their absence.
6. Will an entrepreneur be considered independent if the principal organizes trainings for entrepreneurs?
In the event that the client organizes trainings, ie trainings for entrepreneurs, this can be a strong indicator that the relationship between the client and the entrepreneur is not independent.
In certain situations, the training itself may be a prerequisite for the entrepreneur to start cooperating with the principal at all, where the entrepreneur must undergo specific training in order to be able to provide the service in a manner appropriate to the principal.
7. Will an entrepreneur be considered independent if he normally provides IT services to the principal within premises other than the principal’s business premises, but provided by the principal for these purposes (eg premises are leased)?
Although the law itself does not define more precisely what can be considered as the ordinary use of premises, in this case it can be considered that the relationship between the principal and the entrepreneur is not independent, primarily because the use of the premises within which the entrepreneurs will provide services is provided by the principle.
Therefore, if the client leases business premises within which entrepreneurs provide IT services, the criterion will be considered fulfilled.
8. Will an entrepreneur be considered to be self-employed if he is hired after he has submitted an advertisement for the principal posted on the principal’s website?
Although, according to the current interpretation of the law, this situation implies that the relationship between the entrepreneur and the client is not independent, it may raise the question of the correctness of its application in certain situations.
In the IT industry, for example, it is a common situation for local entrepreneurs to be hired by foreign companies not physically located in Serbia. Due to the fact that these companies are not physically present in Serbia, one of the most common (and even the only) ways to engage the persons who will provide them with services is through advertisements or by hiring head hunting agencies.
This fact may place domestic IT entrepreneurs who provide services to companies not registered in Serbia in a slightly more unequal position than other participants, since, according to the current interpretation of the law, this criterion will be met by a significant part of those persons.
9. Will an entrepreneur be considered independent if the principal provides the basic means in the form of a computer and a mobile phone to be used by the entrepreneur?
In the aforementioned case, the entrepreneur will be considered to be independent in relation to the principal.
10. Will the entrepreneur be considered independent if, at the request of the principal, he purchases a computer and a mobile phone, which will be used to provide the service to the principal, where the customer reimburses the costs to the entrepreneur?
In this case, the client may be considered to have financed the acquisition of the basic material assets that the entrepreneur will use to continue providing the service. In this sense, based on this criterion, entrepreneurs will be considered independent in relation to the originator.
11. Will an entrepreneur be considered independent if he provides his services using his own computer, where the principal requires that he install special software on the computer that exclusively controls the entrepreneur’s activities and potentially gives the principal control over the computer in the event of a computer failure?
Assuming that the special software so installed is not necessary for the provision of the service by the entrepreneur, that is, it will not result in the process of providing the service being in any way managed by the client, but solely for the purposes of protecting the data and property of the client, can be considered that in this case the relationship between the entrepreneur and the principal is independent.
12. Will an entrepreneur be considered independent if he provides IT services to a client using his own computer, while providing services through special software of the principal installed on the entrepreneur’s computer for data protection purposes?
If an entrepreneur directly uses his or her own fixed asset (computer) when providing a service to a client, then in this case it would not be considered reasonable to consider the relationship between the entrepreneur and the client as an independent one, given that the purpose of the special software is to protect important business information that is of importance to the principal. On the other hand, the basic asset used in providing the service (computer) is owned by the entrepreneur.
13. Will an entrepreneur be considered independent if the contract between the entrepreneur and the principal contains a provision under which the entrepreneur, within a period of 6 months after termination of the contract, will not be engaged in the provision of services that can be considered competitive in relation to the services provided to the principal?
One of the main features of entrepreneurial activity is the independence in work, ie the fact that the entrepreneur can independently choose the clients with whom he wants to establish business cooperation.
In this respect, the contract between the entrepreneur and the principal should not contain a provision restricting the entrepreneur’s activities with regard to further engagement, regardless of whether that restriction applies to the period during which the entrepreneur provides services to the principal or to the period after the end of the cooperation between the entrepreneur and the principal.
If the contract between the entrepreneur and the principal contains such a provision, in that case it may be considered that the entrepreneur is not independent in relation to the principal.
In any case, the practical dilemmas mentioned above are just some that entrepreneurs will have in the coming period as far as the “independence test” is concerned. In the coming period, it will be of great importance to follow the instructions and interpretations of the Tax Administration regarding the criteria of the “independence test”, in order to see the understanding or interpretation of the tax authorities of certain criteria from the test.