Independent Contractor Test in Serbia: Compliance Key Points

The independent contractor test in Serbia, also known as the independence test, is a critical assessment used to determine whether an individual operating as an entrepreneur in Serbia (PR) qualifies as an independent contractor or should be treated as an employee for tax purposes. This classification significantly affects taxation in Serbia, as entrepreneurs in Serbia deemed non-independent lose the right to flat-rate taxation and face higher tax rates and additional obligations.

This blog outlines the key aspects of the independent contractor test in Serbia and its implications for entrepreneurs in Serbia and their clients.

What Is the Independent Contractor Test in Serbia?

The independent contractor test in Serbia determines whether an entrepreneur in Serbia operates independently or functions more like an employee under a client’s control. This test evaluates nine criteria, and an entrepreneur in Serbia is deemed non-independent if at least five of these are met. What is interesting is that certain categories of entrepreneurs, such as lawyers, are not subject to this test.

The Idea Behind the Independent Contractor Test in Serbia

The idea behind the independence test in Serbia is driven by the state’s motive to prevent the migration of employees to the business sector for several reasons. The most significant among these is that entrepreneurs in Serbia are not considered employees and therefore do not enjoy the rights and protections afforded to those in formal employment. On the other hand, engaging entrepreneurs is a more financially favorable option for employers, as taxes and contributions on salaries are higher compared to the gross compensation of entrepreneurs. Consequently, public state revenues are lower when companies engage entrepreneurs instead of employees.

Due to these two factors, fiscal policy objectives and the desire to prevent the reduction of employee rights, Serbia has introduced the independence test.

Whether this measure is justified or has negatively impacted the development of certain sectors in Serbia remains an open question.

The Consequences of Failing the Independent Contractor Test in Serbia

Failing to qualify as independent has significant financial consequences, and the allocation of costs depends on the client’s status:

• If the client is a domestic business entity: The client bears all the associated costs.
• If the client is a foreign business entity: The entrepreneur in Serbia bears all the associated costs.

The costs and consequences of failing the independent contractor test in Serbia include:

• Higher Taxes: Non-independent entrepreneurs in Serbia are taxed on other personal income at a rate of 20%.
• Additional Contributions: These contributions cover:
  • Pension and disability insurance.
  • Interest on any overdue amounts.

Therefore, understanding and complying with these criteria is essential for entrepreneurs in Serbia and their clients to avoid substantial tax liabilities.

The Nine Criteria of the Independent Contractor Test in Serbia

1. Work Hours and Availability of an Entrepreneur in Serbia

Entrepreneurs in Serbia are independent if they set their own work hours without client-imposed schedules or mandatory availability. Evidence such as invoices, email correspondence, or agreements that suggest set working hours may signal dependence.

Key Considerations:

• Entrepreneurs in Serbia must avoid structured schedules imposed by the client.
• Time off or vacation should not result in the same invoiced amounts as active periods.

2. Use of Client Premises

Entrepreneurs in Serbia should conduct their activities on premises they own or lease, avoiding reliance on client facilities. Minimal presence at client offices for meetings or reporting is permissible, but continuous use signals dependence.

Key Considerations:

• Entrepreneurs in Serbia must maintain separate business addresses and leases.
• Tax inspectors can review invoices and contracts to verify independence.

3. Training Provided by the Client

Independent entrepreneurs in Serbia typically invest in their own professional development. Therefore, training financed or provided by the client may indicate dependence, particularly if it aligns with the client’s core business needs.

Key Considerations:

• Training to improve general skills supports independence.
• Client-specific training raises red flags.

4. Recruitment Method

Entrepreneurs recruited through job postings or employment agencies may fail this criterion. Independent contractors are usually sourced through different channels, such as direct business negotiations.

Key Considerations:

• Advertisements specifying employment-like qualifications suggest dependence.
• Engaging a third party specialized in locating individuals suitable for employment suggests dependence.

5. Tools, Equipment and Work Management

Entrepreneurs in Serbia should own or lease the tools and equipment necessary for their work. Dependence is evident if the client provides or finances these resources, especially if they are basic rather than specialized tools.

Key Considerations:

• Tax inspectors analyze ownership and financing documentation.
• Micromanagement of tasks or tools by the client undermines independence.

6. Income Dependency

If at least 70% of an entrepreneur’s income comes from a single client or related entities over a 12-month period, this criterion is failed.

Key Considerations:

• Income diversification is crucial.
• Reimbursements for expenses like phone bills may indicate dependence.

7. Alignment with Client’s Business and Usual Business Risk

Entrepreneurs in Serbia whose activities align closely with the client’s core business functions risk being classified as non-independent.

Key Considerations:

• Contracts should emphasize the delivery of specific results rather than ongoing participation in business operations.
• The absence of a clause stipulating that the entrepreneur in Serbia bears the customary business risk for work delivered to the client’s customers, if applicable, further suggests a lack of independence.

8. Work Exclusivity

Engaging multiple clients is a critical indicator of an entrepreneur’s independence, while exclusivity to a single client may signal dependence, increasing the risk of being reclassified as non-independent.

Key Considerations:

• Maintaining an active portfolio of clients demonstrates the entrepreneur’s ability to operate independently and reduces the perception of dependence on a single source of income.
• Avoid contractual obligations or practical arrangements that impose exclusivity, as this could be interpreted as a sign of an employment-like relationship rather than an independent business arrangement.

9. Duration of Engagement

An entrepreneur in Serbia who works for the same client for 130 or more working days within a 12-month period (with or without interruptions) may be classified as non-independent. This extended engagement duration is viewed as a sign of dependence, resembling an employer-employee relationship, particularly if the contract lacks a fixed term.

Key Considerations:

• Payments should be tied to project milestones or results, not fixed intervals.
• Any work performed for the client during a calendar day, even for a few minutes, could count as one working day.

Taxation of Entrepreneurs in Serbia

Entrepreneurs in Serbia classified as independent benefit from lower tax rates (lump sum entrepreneurs) and fewer obligations compared to their non-independent counterparts.

Entrepreneurs in Serbia operating as lump-sum taxpayers are required to maintain a “KPO book” (a record of turnover) to document their business income. If their annual turnover surpasses six million dinars (approx. EUR 50.000) within a calendar year, they must transition to double-entry bookkeeping, similar to the system used by LLCs. This turnover threshold resets at the start of each new calendar year. Until reaching this limit, entrepreneurs in Serbia are only obligated to maintain the KPO book, which can be kept either in physical or digital form (e.g., using Excel), and pay a fixed monthly lump sum for taxes and contributions.

However, failing the independent contractor test in Serbia triggers significant tax consequences, including a higher tax burden, mandatory contributions for pension and disability insurance, and accrued interest.

In addition, they are free to manage the funds in their business and personal bank accounts without restrictions.

Therefore, for entrepreneurs in Serbia, understanding and complying with the independent contractor test in Serbia is essential to optimize tax obligations and maintain professional independence.

Independent Contractor Test – Key Takeaways

The independent contractor test in Serbia is a pivotal factor for entrepreneurs in Serbia and their clients. By meeting the criteria for independence, entrepreneurs can avoid higher taxation and preserve their lump sum entrepreneur status in Serbia. Staying informed about the nuances of taxation of entrepreneurs in Serbia and complying with regulations ensures smoother business operations and better financial outcomes.

Whether you’re an entrepreneur in Serbia or a client (company) engaging an entrepreneur for their services, understanding the independent contractor test in Serbia is key to navigating taxation in Serbia effectively. It is highly advisable to consult with a lawyer for practical aspects of tax audits, additional criteria that the Tax Authority may examine during proceedings, as well as an analysis of your specific business model or situation.

Also, in case you are interested in registering as an entrepreneur and the benefits of doing business in Serbia, read our blog on the topic of Company Formation in Serbia: Your Complete Start-Up Guide and Top 10 Reasons for Company Registration in Serbia.