Amendments to the Law on Personal Income Tax and the Law on Contributions for Mandatory Social Insurance, adopted on 9 December 2022 with implementation starting on 1 January 2023, provide for a reduction of the tax burden on salaries, extend the validity of certain incentives for employment, and define that the annual income tax is taxed through self-taxation, and not, as was the case until now, based on the decision of the Tax Administration. However, amendments’ biggest novelties relate to the taxation of persons who are neither entrepreneurs nor employees (most often, these are so-called workers on the internet – “freelancers”).
Legal amendments do not specifically define “freelancers” but classify them as persons who earn income “from contracted fees for performed work” as well as “from copyright and related rights”. This conclusion is drawn primarily when considering the explanation of the amendments to the laws, where it is explicitly stated that the proposed amendments to the laws were created through the activities of the Negotiating Group formed with the representatives of online workers’ associations.
According to amendments to the laws, freelancers are obliged to pay income tax and social security contributions quarterly by self-taxation (the first tax return must be submitted by the end of April 2023 for the first quarter – the first three months of 2023) choosing one of the following two taxation options that can be changed every subsequent quarter:
- According to the first option, the income tax rate is set at 20%, payable on the quarterly income exceeding RSD 96,000. This option is more suitable for freelancers with lower monthly incomes since they will not have to pay any income tax if they earn less than RSD 96,000 in total for three months. Additionally, freelancers earning less than RSD 96,000 per quarter will only be required to pay social security contributions for health insurance of about RSD 1,400 per month, whereas those earning more than RSD 96,000 per quarter, will pay contributions for pension insurance at a rate of 24% and contributions for health insurance at a rate of 10.3% on the income above RSD 96,000.
- According to the second option, which is more suitable for freelancers earning a somewhat higher income, taxable income will be determined quarterly by deducting (i) the amount of RSD 57,900 and (ii) 34% of the overall quarterly earned income exceeding RSD 57,900, whereby freelancers will need to pay income tax of 10% of the so-determined taxable income, as well as pension insurance contributions of 24% and health insurance contributions of 10.3% of the taxable income, whereby rules on minimum and maximum basis for calculation of such contributions need to be taken into account.
The amendments to the laws reduce the overall rate of pension insurance contributions to 24% and increase the non-taxable amount of salary from RSD 19,300 to RSD 21,712, which will effectively reduce the amount of income tax paid on salary income. More importantly, the non-taxable amount of salary will be regularly adjusted with the inflation rate starting in 2024.
Considering that, according to the data of the Tax Administration, incentives for the employment of new persons who were unemployed for a certain period (so-called “newly employed”) in the past years have shown results and that a significant number of employers have used these incentives, the amendments to the laws extend the validity of these incentives until the end of 2023. These incentives refer to the refund of income tax and social security contributions in the amount of 65% to 75% for newly employed persons, depending on the total number of persons for whom the employer uses incentives.
To automate the annual income tax filing-in procedure, it is planned that the Tax Administration, based on official records, prepares tax returns for taxpayers and posts them on their accounts on the Tax Administration’s online portal by 1 April of the current year for the previous year. The taxpayer is then obliged to check the data from the completed and previously filled-in tax return and, if necessary, change it, and send an amended tax return via the online portal by 15 May of the current year for the previous year. If the taxpayer does not amend the tax return prepared by the Tax Administration, he/she will be obliged to pay the tax in the amount determined in the so-prepared tax return.
During the public discussion about these solutions, criticisms could be heard primarily regarding the changes related to freelancers. Some of the criticisms are that these are ad hoc and selective reliefs which undermine the integrity of the tax system, as well as that both proposed models of freelancer taxation deviate significantly from the system of taxation of the wages of employed persons, thus putting different taxpayers in an unequal position. Despite this, the amendments to the laws were adopted as proposed, and it remains to be seen whether in practice these amendments to the laws will affect freelancers to keep the status they had until now or will change their business in a way that they will establish entrepreneurial agencies or companies.
This text is written for informational purposes only and does not constitute legal advice. We are at your disposal for any additional information