Taxes for Sole Proprietors and the Paušal System in Serbia: A Guide for Relocants and Freelancers

Choosing a Legal Structure: Freelancer or Sole Proprietor?

For many professionals who have moved to Serbia and work with foreign clients, the first question is how to legalize their activities. There are two main paths: working under the special tax regime for freelancers or registering as a sole proprietor (SP).

The freelance regime attracts newcomers with its simplicity: you can receive monthly payments and pay taxes yourself. However, there is a significant risk involved. If you regularly receive the same amount from the same company, tax authorities may interpret this as a disguised employment relationship. This can lead to a reclassification of your status and additional tax assessments.

This is why many eventually switch to becoming a sole proprietor (Individualni Preduzetnik). This status not only provides greater legal stability but also serves as a reliable basis for obtaining and subsequently renewing a residence permit, which is critically important for relocants.

Taxation Systems for Sole Proprietors: Paušal vs. Knjigaš

After deciding to open a sole proprietorship, an entrepreneur in Serbia must choose one of two taxation systems. Each has its own features, advantages, and disadvantages, and the choice depends on the scale and specifics of the business.

There are two main systems: paušal (lump-sum) and bookkeeping-based. Understanding their differences is the foundation for effective tax planning.

The choice between these systems determines the level of administrative burden, the amount of tax payments, and the flexibility in managing the company's finances.

Paušal: Simplicity and Predictability

The paušal taxation system is an ideal option for new entrepreneurs, freelancers, and professionals with a moderate income. Its main advantage lies in its simplicity and predictability.

The tax amount is fixed and calculated in advance based on several factors, including the type of activity and the business location. This eliminates the need to maintain complex records of income and expenses.

• Minimal bureaucracy: no need for complex bookkeeping or constant expense tracking.
• Predictable payments: you know exactly how much tax to pay each month.

However, this system has a strict annual income limit of around 6 million dinars (the amount may change). If your income already exceeds this threshold, or if you receive a job offer with a salary that will guaranteed put you over the limit, it makes no sense to register as a paušal SP. In that case, you must register as a 'knjigaš' from the start.

Knjigaš: Flexibility and Tax Optimization

The 'knjigaš' system involves full-fledged bookkeeping, where taxes are calculated based on the difference between actual income and expenses. This option is more complex but offers greater flexibility, especially for a growing business.

• Hiring an accountant: finding a qualified professional becomes a top priority.
• Documenting transactions: you must meticulously record all financial transactions, keeping receipts and invoices.

This system also opens up opportunities for tax optimization. A common strategy is to set a minimum official salary for yourself, on which social contributions are paid. The main portion of the profit is then withdrawn less frequently, for example, as dividends, which are taxed differently. This approach can reduce the monthly tax burden but requires a deep understanding of the law and mandatory consultation with a professional accountant to avoid problems with the tax authorities.

Key Aspects for Relocants: Residence Permit, Health Insurance, and Legal Address

For relocants, opening a sole proprietorship in Serbia is not just a way to do business, but a key tool for legalization. The status of an active entrepreneur who regularly pays taxes is a strong basis for obtaining and renewing a residence permit. When submitting documents, proof of funds in your account may also be required.

Along with taxes, a sole proprietor pays contributions for mandatory health insurance, which grants the right to receive state medical care. Importantly, the health insurance policy also covers the entrepreneur's family members. For example, a spouse can be included in the insurance even if their own sole proprietorship is temporarily 'frozen' and not making payments.

• Registration problems: without an official contract, they may refuse to register the SP at this address.
• Legal vulnerability: in case of a conflict with the property owner or an inspection by state authorities, the absence of a registered contract leaves you without legal protection.

Nuances of the Transition Period

Transitioning from one legal status to another, for example, from the freelance regime to a sole proprietorship, requires careful planning. A common situation arises when the old residence permit is about to expire, the process of opening the SP is not yet complete, and the next payment from a client is due to arrive in the account.

Receiving income into a personal bank account during such a transition period can entail tax risks. To avoid problems, it is important to act in a coordinated manner.

1. Advance planning: start the process of opening your SP and renewing your residence permit well in advance, without waiting until the last minute.
2. Synchronize processes: try to have the SP registration and the application for a new residence permit proceed in parallel.
3. Consult with an accountant: be sure to consult a specialist on how to legally receive income during the transition period.
4. Communicate with your client: notify your employer or customer in advance about the upcoming change in payment details.