The independent contractor test was introduced into the Serbian legal system to prevent abuses within the tax system. It was created as a response to the increasingly common practice in which individuals avoid entering into employment contracts with employers and instead register as entrepreneurs, subsequently concluding service agreements with their “client,” who is, in reality, functioning as their employer.
This model was used to avoid paying higher taxes and social contributions applicable to salaries, since lump-sum taxation (paušal) for entrepreneurs was typically lower. The independent contractor test was introduced precisely to prevent such misuse.
What Is the Independent Contractor Test?
The independent contractor test was introduced through amendments to the Personal Income Tax Law, effective as of January 1, 2020. It represents a new mechanism for taxing income earned by entrepreneurs and lump-sum entrepreneurs when it is determined that the entrepreneur is not independent in relation to the client.
The core purpose of the test is to establish whether an entrepreneur genuinely operates independently or is essentially in a disguised employment relationship with the client.
Before the introduction of this test, some employers (especially in the IT sector) engaged individuals who effectively worked as employees, but required them to open a lump-sum-taxed business.
Criteria of the Independent Contractor Test
The test consists of several criteria applied to each contractual relationship. By evaluating these criteria, the Tax Administration determines whether the arrangement is being used to avoid higher taxes and social contributions that would otherwise apply to salary payments.
The Tax Administration uses nine criteria to examine the level of independence of an entrepreneur in relation to the client.
The criteria are as follows:
1. Working hours
The client (or an affiliated entity) determines the entrepreneur’s working hours, approves or denies leave, or the entrepreneur’s compensation is not proportionally reduced during leave. The Tax Administration may obtain such data by reviewing computer access logs, email correspondence, work reports, or hourly billing records.
2. Work premises
The entrepreneur typically uses premises provided or designated by the client for performing the assigned tasks.
3. Professional training
The client conducts or organizes professional training or development for the entrepreneur.
4. Method of engagement
The client engaged the entrepreneur following a public job advertisement or through a third party specializing in recruitment, where such engagement resulted in the entrepreneur’s hiring.
5. Tools, equipment, and work management
The client provides essential tools, equipment, or materials needed for the entrepreneur’s regular work, or finances their purchase – except for specialized tools required for specific tasks. The client (or an affiliated entity) also routinely manages or supervises the entrepreneur’s workflow.
6. Income dependency
At least 70% of the entrepreneur’s total income over a 12-month period (linked to the relevant tax year) is earned from one client or from entities affiliated with that client.
7. Business risk
The entrepreneur performs tasks within the client’s scope of business, and the service agreement does not contain a clause assigning the usual business risk to the entrepreneur for the work delivered to the client’s customers.
8. Restriction on working with other clients
The service contract includes a partial or complete ban on the entrepreneur providing services to other clients, except for a limited ban regarding direct competitors.
9. Number of working days
The entrepreneur performs activities for the same client for 130 or more working days within a 12-month period. Any work performed during a calendar day counts as one working day.
How the Criteria Are Evaluated
Independence cannot be determined based on a single criterion. Real-life business arrangements can vary significantly, and it is often not straightforward to determine whether they resemble an independent contractor relationship or an employment relationship.
For this reason, the law applies a multi-indicator approach.
If 5 or more criteria are met, the conclusion is that the entrepreneur is not independent, and the income earned is taxed accordingly.
Because this test is an exception to the general tax rules for entrepreneurs, the provisions regulating it should be interpreted narrowly, to avoid unjustified expansion of its scope.
Who Is Subject to the Independent Contractor Test?
Subject to the test:
Entrepreneurs registered with APR who keep accounting books and pay income tax on actual profit
Lump-sum entrepreneurs (paušalci)
“Entrepreneur” or “lump-sum entrepreneur” refers to a natural person registered with the competent authority, paying tax either on taxable profit or on lump-sum income.
Not subject to the test:
Agricultural entrepreneurs
Other entrepreneurs who are not APR-registered (e.g., VAT-registered individuals without APR registration)
Legal entities
Additionally, income earned by professionals who cannot legally be employed by a client under the statute governing their profession is not classified as other income for the purposes of this test.
Examples:
Lawyers cannot be employees except in a partnership structure; thus, income from a single client does not fall under the test.
Public enforcement officers also operate exclusively as entrepreneurs, and forming an employment relationship would result in dismissal from office.
Therefore, tax inspectors must consider not only tax legislation but also the substantive regulations governing specific professions.
When Is the Test Applied?
During tax audits initiated by the Tax Administration
When there is suspicion of a disguised employment relationship
At the initiative of the client (company) – many companies proactively analyze risk
Consequences of Failing the Independent Contractor Test
If an entrepreneur is deemed non-independent, the income earned from the client is taxed as other income, at significantly higher rates than typical entrepreneurial income.
The consequences differ depending on whether the client is domestic or foreign.
If the client is a domestic legal entity:
Income is taxed at 20% withholding tax, without standard cost deductions
Mandatory social contributions (PIO) are also calculated on the same base
The client becomes the taxpayer responsible for calculating and paying tax and contributions
During a tax audit, if non-independence is established, the client must pay retroactive tax, contributions, and interest
If the client is a foreign legal entity:
The entrepreneur must self-assess and pay tax and PIO contributions
A special tax return (Form PP OPO) must be submitted
Annual income tax
Income classified as “other income” is included in the annual income tax calculation.
Limit for lump-sum taxation
Income reclassified as “other income” does not count toward the 6,000,000 RSD annual revenue limit for paušal taxation.
No double taxation for lump-sum entrepreneurs
Lump-sum entrepreneurs are not double-taxed, because their taxes are not based on actual revenue.
How to Pass the Independent Contractor Test
To successfully pass the test, an entrepreneur must carefully analyze each criterion and assess whether it is met. It is essential to clearly define the business relationship in the contract, particularly regarding:
autonomy in setting working hours,
use of premises and equipment,
ownership of tools,
and independence in performing tasks.
Documentation is crucial – internal records, invoices, email correspondence, and evidence of work for multiple clients can all serve as proof of independence.
It is also vital to monitor income sources to ensure no more than 70% comes from a single client.
Working with tax lawyers provides professional guidance, reduces risk, and increases the likelihood of a positive outcome during inspection.
The Independent Contractor Test and the IT Sector
It is evident that the introduction of this test has had the strongest impact on the Serbian IT community.
IT entrepreneurs are highly mobile, not dependent on location, face no language barriers, and can easily relocate their operations abroad. The IT sector contributes significantly to state revenue while expecting comparatively little in return.
By tightening taxation through the independent contractor test, the state risks pushing IT freelancers and entrepreneurs to register their businesses in foreign jurisdictions offering more favorable conditions – effectively shifting taxable income out of Serbia.
Preventive Measures and the Role of Lawyers
Entrepreneurs can apply preventive measures to reduce risk, and the role of a lawyer is crucial in this process. A lawyer familiar with tax regulations can guide both entrepreneurs and clients on structuring their business relationship in compliance with the criteria.
A lawyer can assist with:
Contract review: Identifying provisions that may be risky and advising how to adjust them.
Representation during tax audits: Preparing documentation, communicating with inspectors, and defending the entrepreneur’s position.
Ongoing advisory: Helping entrepreneurs understand their status and obligations at any stage.
Conclusion
The independent contractor test in Serbia is of great significance for both entrepreneurs and clients. Knowledge of tax-specific rules and consistent compliance ensures legal certainty, reduces risks, and ultimately improves financial outcomes.