Remote Work in Serbia: Guidance for Digital Nomads and Policy Makers

By Sofija Popara with the insights from the Pausal team

Working remotely is starting to represent an increasingly significant part of Serbia’s economy. This is best shown in the fact that Serbia ranks among the top ten countries in the world when it comes to its growing number of freelance workers.

Due to the significant advantage which lies in the fact that the worker is not physically bound to their workplace, remote work model is a huge opportunity for developing countries. It enables them to connect with the global market while also attracting a large number of digital nomads who would prefer to pay taxes in your country thanks to its simpler taxing system. The advantage that developing countries have lies in the fact that they are often more affordable to live in, especially for people who work in the global markets. This is yet another factor that may attract people who work online. This is also shown by the rating that Serbia got in one of the most popular freelancer websites nomadist.com. This website rates Serbia as a country with low living expenses, fast internet and good nightlife, which is considered a huge advantage by anyone working remotely.

The COVID-19 pandemic has been the best indicator of just how important remote work will become in the future as a significant factor in the economy. Many companies that used to employ the classic work model have been forced, due to the COVID-19 pandemic, to switch to an online work model. This has shown to be extremely efficient in terms of doing business. Remote work is slowly becoming the lifestyle of an increasingly large number of people in Serbia.

Guidance for digital nomads

If you are a remote worker or a digital nomad in Serbia, you can operate in three possible ways, which are:

1. Working as an individual
2. Working as an entrepreneur
3. Working as a limited liability company

Freelancers working as individuals

Working as an individual in Serbia is very costly due to the fact that the percentage of your earnings which you owe to the state is 44.64%.

If you are working remotely as an individual, the method in which you are taxed is defined by the Law on citizens’ income tax, in article 85 under the so-called in “other kinds of income”. Seeing how there are standard costs within this model that amount to 20%, the tax and endowment fees will be applied to 80% of your income in this case. Your dues if you are working as an individual include the following:

- A 20% tax rate of the tax base.

- Endowment fees for mandatory retirement and disability insurance 25.5% of the tax base

- Health insurance 10.3% of the tax base

The main drawback of this model of business is its high cost. This is also the main reason why most freelancers in Serbia used to work in the grey zone.

Freelancers working as entrepreneurs

If you decide to work remotely in Serbia as an entrepreneur, you will need to choose between two basic types of entrepreneurships in Serbia: flat rate entrepreneur and business bookkeeping entrepreneur.

If you decide to work as a flat rate entrepreneur, you will pay a fixed tax rate to the state as well as endowment fees imposed by the tax administration based on tax reports. The amount paid depends on a variety of factors, such as the place of registration, the type of activity you do and others. Working as a flat-rate entrepreneur is currently the most popular option for people working remotely because it costs the least and comes without the obligation of business bookkeeping. In order to work as a flat-rate entrepreneur, you have to pay attention to two limitations. One is that your income for a single calendar year must not go over the limit of 6 million because otherwise you will be obligated to enter the VAT system, and that would mean you lose your status as a flat-rate entrepreneur.

The second type of entrepreneur is the bookkeeping entrepreneur. The bookkeeping entrepreneur can choose between self-taxation and personal income. If you opt for self-taxation, you are stating that you are not employed and not receiving a salary, which is a good option if you know that your business will be slow because it will drastically reduce your expenses. However, as an owner of an entrepreneur business, you will have to pay taxes and endowment fees in order to have attain the right to health insurance or retirement. On the other hand, if you are expecting your business to do well from the start, you can select the personal income option instead. This means that you will register as employed and you will set your own salary that you will pay yourself on a monthly basis. Just like for any employee, the salary comes with taxation and endowment fees which must be paid to the state. The higher the salary, the higher tax and endowment fees you will pay.

As stated in the name, the bookkeeping entrepreneur, unlike the flat-rate worker, will be obliged to keep their business books and account for their expenses. This means that they will not be at liberty to withdraw money and make payments from their entrepreneurship account as they please, but rather every expense must be related to their business operation and come with its own receipt, addressed to the entrepreneur. Seeing how the bookkeeping entrepreneur is under obligation to keep their business books, you will also be under obligation to pay citizen income tax which is 10% of your overall earnings and this is paid at the end of every year.

In addition to all the drawbacks, working as an entrepreneur has been the most profitable option for freelance workers up until year 2020. The situation has largely changed in March 2020, when the independence test was introduced. The independence test puts to trial the relationship between the entrepreneur and their clients. The test itself is a test of responsibility on both sides. If the entrepreneur is working with an international client, the entrepreneur will be the one to bear any consequences of failing the test and their income would then be taxed as though they are operating as an individual. If the client is the native citizen, then they will bear the consequences. The entrepreneur will fail the independence test if they fulfil five or fewer out of ten criteria. This will mean that they are not independent in relation to their client when it comes to performing their activities. If the entrepreneur fails the independence test, the tax inspectors will retroactively tax all their income in relation to the client with whom the entrepreneur has failed the independence test.

Initially, the independence test originated with the idea to root out hidden employment which is often abused by companies. Unfortunately, it brought with it the consequence of introducing uncertainty, especially for entrepreneurs who work with international clients. In order to prevent the independence test from being implemented, the Digital community association was founded and it gathered a large number of entrepreneurs who work with international clients and are discontent with the idea of the test. To them, the entrepreneur business model had been the most cost-effective, but due to the instabilities introduced by the independence test, they were forced to change their business models. In order to facilitate this transition for entrepreneurs who are doing their work online, the state has implemented tax benefits for entrepreneurs who are closing their agencies and entering employment or founding their limited liability companies.

In order to gain insight on the impact that the independence test will make within its first year of use, the Digital community carried out a survey. The survey primarily targeted digital workers who work in IT, sales, marketing, HR, administration and education. Most of the questionees work with international clients — up to 71.4% of them. Based on the survey results, the Digital community association has reached the conclusion that up to 65.78% of the questionees were driven to change their business model due to the independence test. The survey has shown that due to those business model changes, the tax and endowment expenses of IT workers have increased by 2.4 times. In addition, they were now dealing with bookkeeping expenses that are mandatory for them in order to operate as a limited liability company. Namely, the survey has shown that while they were working as entrepreneurs, the questionees paid an average of 28,909 Serbian dinars (RSD, approximately 245 EUR) for their tax and endowment fees, while now as employees in their own limited liability companies they pay on average 70,386 Serbian dinars (~ 600 EUR).

The biggest problem with the independence test is that it’s still uncertain how the regulation of the test will work. The rules have not been defined clearly enough and leave a lot of room for free interpretation of the criteria by tax inspectors. It’s not uncommon that the entrepreneurs get conflicting advice from their accountants and tax advisors, which further increases their confusion. The regulations are still not intensive and there isn’t an example of good practice in which regulations can be implemented. This is the main reason why most entrepreneurs working in IT have currently frozen their companies until they see what will happen with benefits and law amendments in the future.

*Discrimination against women entrepreneurs

An additional problem encountered by freelancers working as entrepreneurs is the discrimination faced by women entrepreneurs compared to women who are working as employees when it comes to making use of their pregnancy, maternity and child-care leave. For example, an entrepreneur who decides to continue working during her pregnancy leave must authorize a manager who would work on her behalf. At the same time, if her entrepreneur company continues to work during her pregnancy leave, she isn’t entitled to the full amount of her pregnancy leave compensation, but rather only 50% of it. Seeing how work continuity is highly important for almost any entrepreneur’s business so that they can keep their clients, this stipulation is highly problematic and unstimulating.

Moreover, women entrepreneurs are discriminated against when exercising their right to maternity and child-care leave. During maternity and child-care leave, women entrepreneurs don’t receive retirement and disability insurance payments, as well as health insurance and unemployment insurance. Unlike them, women who are registered as employees of a company continue to get endowment fee payments even while using the listed rights. Another form of discrimination against women entrepreneurs compared to women in employment is that a woman entrepreneur cannot get a 2-year long leave if she has her 3rd or any subsequent child. She only has the right to a 1-year-long leave. And finally, they cannot transfer their right of child-care leave to their partners, even if they need to due to the nature of their work.

Freelancers working as a limited liability company

As explained above, due to the uncertainty imposed by the independence test, the entrepreneurs who work remotely are driven to change their business model to a limited liability company. Although the state has made certain concessions, it still caused their expenses to blow up by 2.4 times.

A limited liability company is a legal entity that has a founder and a director. What sets it apart from an entrepreneur is that as a legal entity it will independently dispose with its own property i.e., the company property. It is also under the obligation to keep its business books and, if it chooses, can enter the VAT system. This entity is meant for companies who have more expansive needs compared to smaller businesses, seeing how it’s a much more expensive business model. This is why it’s poorly suited for former entrepreneurs who work remotely.

Driven to change their form of business, former entrepreneurs now form single-member limited liability companies. The problem that they face are certain standards that a limited liability company has to meet, which are highly unsuitable for a single-member company. One example is that each limited liability company must own a fire extinguisher in their location of business. When you work remotely, you’ll be doing most of your work from your home, at your home computer — which makes it clear why this kind of obligation is unsuitable for your situation.

Another drawback is that limited liability companies are often burdened with various bureaucratic obligation that don’t make a lot of sense for a single-member company. Obligations such as internal documentation, decrees, rulebooks, archiving and the like. If any of these documents isn’t compliant with regulations, the fees can be very steep and unrealistic for a single-member company.

In order to improve the position of IT workers in Serbia in the future, the association Digital community cooperates with the Initiative “Digital Serbia” and have proposed 11 measures whose goal is to encourage economic development based on innovation and promote further development of the IT sector as one of the most important sectors in Serbia. Some of these measures have to do with extending the benefits for entrepreneurs who were forced to change their business model due to the independence test and opening new avenues for entrepreneurs who would like to do so now.

Serbian freelance in the grey economy

The main issue is that people who are working remotely are not recognized by law as employees, but they are instead forced to adjust to existing work models. Due to this problem with Serbia’s legal system, remote workers — also known as freelancers — have found themselves in an unfavourable position. Lack of regulation and information has led to the current situation in which the future of freelancers in Serbia is uncertain.

The state has started to take steps in freelancing regulation in October 2020, which is when it became obvious that many of them had been working in the grey economy. The tax administration of Serbia has stated in one of its publications that they have prepared over 40,000 solutions related to the tax debt owed by freelancers to the state five years back. There are multiple reasons why many freelancers in Serbia have been operating outside of the law. A lot of it can be attributed to a simple lack of information, but also the non-existent business model that would be adequate for freelancers, especially those who are making low-income. For example, if your income is low, then all the business models you have at your disposal are not sustainable. In other words, if you are earning less than 50,000 RSD (~ 424 EUR) per month in Serbia, you have a higher motivation to operate in the grey area of the law. The average monthly earning in Serbia for July 2021 amounted to 49,999 RSD (~ 424 EUR), which means that over 50% of employees in Serbia have earned up to that amount. This is another indicator to how many opportunities can become available form working remotely in Serbia.

With the announcement of tax regulation from October 2020, the freelancers have organized into several associations in order to protect their own interests in front of the state. The most prominent of these organizations is the Internet workers’ association who have eventually accepted the terms offered by the state. Namely, the state has enabled the freelancers to pay their taxes for the five years leading up to 2021 at a very affordable tax model. According to this agreement, the freelancers won’t have to pay endowment fees and taxes if their yearly earnings amount up to 768,000 RSD (~ 6513 EUR). As part of this agreement, the state has also enabled the freelancers to participate in work groups who will create the proposition of the Law on flexible forms of work which would also regulate the freelancing activities in Serbia. Unfortunately, although this was long overdue even then, this group has yet to be formed which leads to the conclusion that the freelancers’ future in Serbia will continue to be uncertain after 2022.

Conclusion

The popularity of freelancing in Serbia can be attributed to several factors. Above all, it’s the ability to access higher paying jobs which can also serve as sources of additional income. Working remotely presents opportunities for young workers who were unable to find work in the offline world. In addition to all its advantages, working remotely also comes with its own challenges. Recently we’ve seen an example from the Republic of China of how working remotely can also bring uncertainty. Specifically, the regulations issued by China in order to take some pressure from school children who are too overburdened with school work and in order to prevent finances from leaving the country. It’s estimated that these regulations can affect over 20.000 people in Serbia who provide online English lessons.

Just like many other developing countries, Serbia is also facing the problem of young people leaving the country in search for better life conditions. Working remotely can be a huge advantage for Serbia in that regard, if it can enable the freelancers to work in stimulating conditions that suit their position. At the same time, freelancing can be an opportunity for Serbia to attract digital nomads as well.

Serbia should reform its tax system and create such a tax environment that would encourage remote working. The competitiveness of Serbian freelancers in the global market can largely contribute to strengthening our economy as a whole. The country should do everything it possibly can to help its economy to survive in an uneven struggle for global competitiveness.

The opinions and views expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of Reshaping Work.