On 1 January 2023, the amendments of Law on Personal Income Tax and the Law on Compulsory Social Security Contributions (“Laws“) came into force.
With the amendments of the Laws the contributions for mandatory pension and disability insurance were reduced from 25% to 24%. Also, instead of the previous RSD 19,300.00 which was the non-taxable amount used to determine the basis for calculating income tax, it has been increased to RSD 21,712.00, and the next increase is scheduled for 1 January 2024. In addition to the above, from 1 January 2023, the annual personal income tax is paid by self-taxation, i.e. the taxpayers of that tax (all persons who in the calendar year earned an income greater than three times the average annual salary per employee) are required to independently calculate the tax on realised income (for the amount that exceeds three times the annual average salary) and submit a tax return for the calculate tax.
However, the novelties provided for in the mentioned Laws, which caused the biggest storm among the public, concern freelancers, i.e., new models of taxation of income from contracted fees for which tax is paid through self-taxation, and which are applied to this group of persons from 1 January 2023.
There are two models for determining taxable income which can be chosen by persons who earn it based on the agreed remuneration from copyright and related rights and the agreed remuneration for the work performed and for which the tax is paid through self-taxation.
Freelancers have the discretion to choose a model for determining taxable income when submitting a tax return. This somewhat unexpected freedom of choice gives freelancers the right to freely switch from one taxation regime to another on a quarterly basis, and with the use of this “strategy”, it may happen that freelancers who have significant turnover only in some quarters, can in those quarters in which they earn lower incomes, practically completely avoid paying taxes and contributions.
According to model A, the amount of RSD 96,000.00 will certainly be tax-free at the quarterly level at which the tax return is submitted. If the freelancer opts for this model, the tax rate will be 20%, so any amount that exceeds RSD 96,000.00 on a quarterly basis will be taxed at that rate. Also, if the freelancer earns quarterly income in the amount of less than RSD 96,000.00, he will not have the obligation to pay contributions for pension and disability insurance and health insurance in that quarter. The minimum amount for paying contributions (if the income is more than 96,000 RSD on a quarterly basis) will be RSD 1,402.00 per month, or RSD 4,206.00 quarterly, and the rates for paying contributions will be 24% for pension and disability insurance and 10.3% for health.
According to model B, the standardized costs amount to RSD 19,300.00 per month, or RSD 57,900.00 per quarter. To this amount, 34% of the income generated during the quarter should be added, which will not be taxed. Therefore, in order to determine the base for taxation, from the income of freelancer on quarterly level should be deducted fixed 34% of the income, and then additional amount of RSD 57,900.00. Under this model, the tax rate will be 10% and contributions will also be paid on the same basis. The minimum amount for paying contributions is RSD 23,160.00 per month for pension and disability insurance, or RSD 4,206.00 for health insurance contributions, and the rates for paying contributions are the same as for model A (24% for pension and disability insurance and 10.3 % for health insurance).
Based on the presented facts, it is clearly concluded that model A is certainly more profitable in situations where the freelancer generates lower income on a quarterly basis, while with the growth of income, model B becomes more and more receptive. It is also important to note that freelancers who do not generate income during the quarterly period will not have the obligation to submit a tax return.
The Laws remain deprived of a precise definition of freelancers, and the rights guaranteed to them by the laws are at a lower level compared to the rights guaranteed to employed persons. Namely, freelancers will still not have the right to sick leave, while women who work as freelancers will not have the right to paid maternity leave. Also, freelancers will not be able to protect their labour rights through union organizing.
The calculation of income tax for the period from 2017 to 2020 remains an unresolved issue. It is important to note that the Tax Administration, in December of the previous year, sent the decisions for the payment of tax on the income from the agreed remuneration from copyright and related rights and the agreed remuneration for the work performed realized in the course of 2017 to avoid the expiration of the statute of limitations. This practically means that freelancers will be able to pay the taxes incurred in the mentioned period by paying up to 120 monthly instalments, but they will have to pay them because otherwise they will be faced with enforcement. According to the same principle, it is expected that tax decisions will be issued for the years 2018, 2019 and 2020, and for the years 2021 and 2022, by previous amendments to the Laws was prescribed that only freelancers who have earned an income of more than RSD 768,000.00 will pay taxes and contributions.
It remains to be seen how these issues will be regulated in the future and whether a way will be found that will reconcile the conflicting interests of the government and the freelancer association.
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