Flat tax rate or bookkeeping - what is better for a sole proprietor in Serbia?

Razlika izmedju pausala i vodjenja knjiga

If you are thinking of starting your own business, or you have already started it, you have probably considered in detail the legal form in which to register and decided to register as an entrepreneur. However, not everything is so simple and there are certain issues that you need to pay attention to in order to make sure you have made the choice that best suits your business needs.

What is an entrepreneur - sole proprietor?

An entrepreneur (i.e. sole proprietor) is a natural person who is registered in accordance with the law for performing a business activity. A sole proprietorship is somewhat similar in many legal systems. An entrepreneur, unlike a limited liability company (L.L.C.) or a joint-stock company, does not have the status of a legal entity. Unlike an LLC, it is very important to emphasize that the entrepreneur is responsible for all obligations with his own, personal, assets, while with an LLC this is not the case - there is a corporate veil - except in exceptional cases. What does this mean in practice? If the entrepreneur does not pay taxes and contributions for social security, the state as a creditor can collect such public income in the enforcement procedure from the assets of a natural person - the entrepreneur.

What are the types of entrepreneurs?

Depending on the tax regime applied to them, entrepreneurs can be essentially divided into two groups, as follows:

1) Entrepreneurs who keep the books
2) Entrepreneurs who do not keep the books (Flat tax rate entrepreneur)

In the graph below, we have shown paramount differences between these two types of entrepreneurs in Serbia, and below the graph, there is a somewhat more detailed explanation of the mentioned differences.

1) Can the sole proprietor be in a VAT system?

An entrepreneur who keeps the books can be in a VAT system, while a flat tax rate entrepreneur cannot. An entrepreneur who keeps the books can access the VAT system either at the moment of registration, by choice or mandatory when their revenue exceeds 8 million RSD in the last 12 months. The limit of 8 million RSD is assessed in the previous 12 months, and not in the calendar year, as the limit of 6 million RSD for mandatory bookkeeping, from point 3, is seen. Therefore, if you earned 5 million RSD in December and another 4 million RSD in January, you exceeded the limit of 8 million RSD in the previous 12 months and enter into a VAT system, regardless of the fact that December and January are in different calendar years. With respect to this limit, the calendar year does not matter.

2) Is he limited in the choice of business activity?

A flat tax rate entrepreneur is largely limited to the business activity he or she can perform, while this does not apply to the entrepreneur who keeps the books. For example, a flat tax rate entrepreneur cannot perform activities in the field of marketing, catering and trade, while an entrepreneur who keeps books can perform any activity. The website of the Tax Administration contains a list of activities for which the right to a flat tax rate is recognized. If the code of the business activity you want to perform is not on the list, you will be obliged to keep books.

3) Does he have a revenue limit?

Entrepreneur can be taxed at a flat rate only if he earns less than 6 million RSD in revenue during the calendar year. In case he exceeds this limit, the entrepreneur is obliged to keep books (he becomes the first type of entrepreneur). This limit is assessed according to the calendar year, so from January 1 to December 31, the income must not exceed the amount of 6 million RSD, in order to maintain the flat tax rate status. Also, the moment of issuing the invoice is crucial. For example, if you issued an invoice on December 30, 2021, and the client paid you on January 5, 2022, that income is perceived as income in 2021, regardless of the fact that it was collected in the next year.

4) Does he pay a fixed monthly tax?

A flat tax rate entrepreneur pays a fixed monthly tax, while an entrepreneur that keeps the books pays corporate income tax at a rate of 10%. This, therefore, means that the first type of entrepreneur has to keep books and self assess the amount of corporate income tax, for which it is usually necessary to hire an accountant, which represents an additional cost for the bookkeeping entrepreneur.

5) Which one has lower contribution cost?

Flat tax rate entrepreneur has fixed monthly contributions for social security that are calculated depending on the business type and the place where the business is conducted. In many cases, they will have lower contribution costs than an entrepreneur who keeps the books, i.e. the total burden on the entrepreneur, when the accountant's fee is added to taxes and contributions, will be lower if he decides to be a flat tax rate entrepreneur. However, flat-rate taxation is volatile in the long run because the state can always decide to raise the amount of flat-rate tax, so that it becomes less profitable. In that case, and at any moment, the a flat tax rate entrepreneur can switch to another system and become a the entrepreneur who keeps books. You can calculate the amount of taxes and contributions that you will be obliged to pay as a flat tax rate entrepreneur using the Flat Tax and Contributions Calculator on the Tax Administration’s website. Although, we emphasize that entrepreneurs have complained in the past that this calculator does not calculate the exact amounts. Of course, the exact amount of taxes and contributions that you will be obliged to pay will be determined by the decision of the Tax Administration.

6) Does he submit the annual financial report?

Unlike an entrepreneur who keeps the books, who is obliged to submit the annual financial report, a flat tax rate entrepreneur does not have such an obligation because he pays fixed monthly tax, and besides, is not obliged to show or justify business expenses.

7) Is he obliged to have an accountant?

Flat tax rate entrepreneur is not obliged to have an accountant, while an entrepreneur which keeps the books has such obligation in order to calculate the tax amount at the end of the year, draft an annual financial report, etc. The only obligation of a flat tax rate entrepreneur is to record issued invoices in a book (or excel file) called KPO. A flat tax rate entrepreneur can hire an accountant if he or she does not want to fill in the KPO record himself and create invoices, or he can pay for some of the existing software offered for that purpose. Creating invoices and keeping a KPO record is usually a simple matter, but existing software enables automation of this process and facilitates operations.

8) Can he withdraw the cash without justification?

Everything that a flat tax rate entrepreneur earns can be withdrawn anytime, without any additional tax or justification. He can withdraw up to 6 million RSD per year, or up to 150 thousand RSD per day, both at the ATM with the entrepreneur's credit/debit card and with the transfer order (eg. via the m-bank application) from the entrepreneur's account to the account of the natural person who is an entrepreneur. The entrepreneur that keeps the books can raise his salary (which affects the amount of contribution he will pay for that month) or he or she can withdraw the business profit, but unlike for flat tax rate entrepreneur will be taxed in the amount of 10% of that amount. If the bookkeeping entrepreneur withdraws funds from the account without any proof of business expense, in order to justify the withdrawal, he or she is obliged to pay a 10% tax on such withdrawal of money, unlike a flat tax rate entrepreneur who withdraws money without justification.

9) Does he have to justify the business cost?

If an entrepreneur keeps the books he or she is obliged to justify everything he or she funds from the company’s account with an invoice, while a flat tax rate entrepreneur does not have such an obligation.

Which business activities can flat tax rate entrepreneurs perform?

Since this text would be extremely long if we listed all the activities and their codes that you can perform as a flat tax rate entrepreneur, we will only highlight some of the broader areas of business to which these individual activities belong:

1) Agriculture, forestry and fishing
2) Mining
3) Manufacturing industry
4) Water supply and wastewater management
5) Construction
6) Traffic and storage
7) Information and communication
8) Administrative and support service activities

If you are not sure whether the business activity you want to perform can be taxed at a flat rate, feel free to contact our lawyers to help you out and clarify any concerns.

Which type of the entrepreneur should I choose for my business?

After we introduced you to the differences between flat tax rate entrepreneurs and those who keep the books, it is likely that you have gained awareness of which of these two types of entrepreneurs would best suit your business needs. However, in order not to make a serious mistake at the very beginning of your business, the Pekić Law Office is at your disposal for all types of legal matter, as a business law attorney, from the registration of an entrepreneur to any legal advice afterwards. You can contact us via e-mail address [email protected], or by sending a message on Facebook Messenger or Linkedin.