Experts call for change in lump sum limit
Small entrepreneurs in Serbia, who operate on a flat-rate model, are finding it increasingly difficult to stay within their simple taxation regime. The Personal Income Tax Law stipulates that if an entrepreneur earns more than six million dinars in a calendar year, they automatically lose the right to flat-rate taxation. This limit has not been changed since 2013, although, according to official data, inflation has “eaten” about 70 percent of its real value during that time.
“Today, more and more entrepreneurs are exiting the flat-rate system not because they have become richer, but because of basic market dynamics,” states the latest edition of NALED’s Grey Book.
Adding to the confusion is the fact that the threshold for entering the VAT system — eight million dinars — is not calculated per calendar year, but for the last 12 months of business. Therefore, entrepreneurs can enter the VAT system even if they have not exceeded the six million dinars threshold in the current year, and the transition to VAT automatically means the end of flat-rate taxation, with the obligation to keep business books and additional costs for the accountant and administration.
The biggest frustration among flat-rate taxpayers, however, is the lack of flexibility in changing the taxation method. Namely, the ePorezi system allows switching to another regime only until December 15 for the following year, and only electronically. At the same time, the system only allows switching from flat-rate to self-taxation or from self-taxation to the personal income regime — a direct switch from flat-rate to personal income is no longer possible, although it was common in the past.
The situation is further complicated by the opinion of the Ministry of Finance from 2020, according to which an entrepreneur who loses the right to a lump sum during the year cannot switch to the payment of personal earnings that same year, but must wait until the end of the year and file for the next one. Experts point out that this position is not based on legal changes, because the Personal Income Tax Act does not prohibit such a change. Before the introduction of ePorezi system, this procedure was much simpler and possible during the year, without additional bureaucracy.
NALED: Necessary changes to the law and more flexible transition of lump sum payments to personal earnings
In practice, small entrepreneurs in Serbia who exceed the six million dinar turnover threshold during their business activities are forced to abandon flat-rate taxation, and after 8 million to enter the VAT system and start keeping business books. However, even then they are not allowed to, if it is most convenient for them, switch to taxation based on personal income and thus ease the transition to a more complex tax regime.
To address this issue, NALED analysts propose amendments to the Personal Income Tax Law in the latest edition of the Grey Book. The key recommendation is to increase the flat-rate taxation threshold from six to eight million dinars of annual turnover, thus aligning it with the threshold for entering the VAT system. This issue has been addressed in a similar way in other countries in the region, such as Croatia and Montenegro.
NALED also proposes two specific options to facilitate the transition to personal income taxation. The first is for the Ministry of Finance to issue an interpretation that would clearly allow an entrepreneur to switch to this form of taxation after exceeding the limit, which would be binding on the Tax Administration. The second option is legal — an amendment to Article 33a of the Personal Income Tax Law in order to explicitly regulate the method of transition from one regime to another.
Additionally, experts emphasize that it is necessary to adapt the ePorezi system so that this functionality is available to entrepreneurs and enables a simpler transition to the new method of taxation.
