Platform work and growing tax risks in Croatia

Most EU Member States, including Croatia, are announcing plans and seeking solutions related to the regulation of work allocated through digital labour platforms. For example, the Commission Work Programme announced a legislative initiative designed to improve the working conditions of platform workers by the end of 2021. The initiative would provide for dignified and transparent working conditions and adequate social protection for platform work.

In Croatia, new amendments to Labour Law should define work allocated through digital labour platforms, which will also affect the tax treatment of remuneration for such work.

The European Agency for Safety and Health at Work (EU-OSHA) indicates that working via digital labour platforms includes “a wide array of working arrangements/relationships, such as (versions of) casual work, dependent self-employment, informal work, piecework, working from home and crowd work, in a wide range of sectors”.

The EU-OSHA further points out that ”the actual work provided can be digital or manual, in-house or outsourced, high-skilled or low-skilled, on-site or off-site, large- or small-scale, permanent or temporary, all depending on the specific situation. In order to constitute work and to be part of the online platform economy, it must, however, be provided for remuneration, thus excluding genuine ‘sharing’ activities”.

Whether the Croatian Labour Law will define digital labour platform work as an employment relationship, and how it will do so, will also influence the way it is treated for tax purposes.

It is important to point out that the current tax regulation already stipulates criteria for determining what income is considered and taxed as income from employment (salary), although it is not formally based on an employment relationship under Labour Law. In this regard, digital labour platform work could already now be monitored and assessed by the Tax Authority – if in fact it counts as employment i.e., if tax advantages are being used illegally.

The Croatian General Tax Act and Income Tax Act and Regulation stipulate that any income generated from activities that have elements of employment is considered to be income based on an employment relationship. If a paying agent liable to pay the income for work having elements of employment concludes some other form of agreement with an employee, which would be subject to lower tax rates, this represents the illegal use of tax advantages. In such a case, tax liabilities must be calculated as if there were no tax advantages.

The Tax Authority may analyse the business operation of a taxpayer - employee in case of suspicion that tax advantages being obtained against the law. Specifically, it will be verified whether there are some deviations compared to typical elements for income earned, or in respect to other taxpayers with the same or similar business activity. Depending on what the Tax Authority finds, a procedure of establishing elements of employment is initiated (in respect of the paying agent in question).

It is important to point out that the Tax Authority may conclude that certain work has employment elements regardless of the method through which the work was concluded and even if the employee is a sole trader, and the services were agreed in such status.

An obvious example of unauthorised use of tax advantages would be the incorporation of a general sole trader (Croatian legal form: paušalni obrt) and concluding an agreement with a company that has employees for the same services. Namely, the advantage of a general sole trader is a lower tax burden, and this has been introduced to facilitate work for self-employed individuals who are just starting out or have limited income (the limit is HRK 300,000 per year). If this organisational form is used in order to obtain a larger income with lower taxes, this will be considered contrary to the purpose of the law.

Furthermore, the Tax Authority may establish whether certain work / engagement has elements of employment by collecting and comparing all the facts relevant for taxation and verifying three criteria: (1) behaviour control, (2) financial control, and (3) relationship between parties.

From an employee perspective, facts that are relevant for taxation include, for example: which business activity is performed and for how long, is there an established business plan in place, and in which way is the employee active on the market, what is the usual method of finding business partners, and how many business partners does the employee have?

Behaviour control includes elements which indicate whether the paying agent has the right to direct and control what the employee is doing and how the work is performed, e.g. through instructions and training. The Tax Authority will assess whether the paying agent is determining the time, place, and method of work, whether the equipment or means for work are provided by the paying agent, and whether the working hours are recorded.

Financial control would mean that the paying agent is entitled to direct or control financial and business aspects of the employee’s work. For example, the Tax Authority will verify whether the paying agent is controlling the employee’s method and scope of service performance. It is also important whether the employee’s business and travel expenses are agreed upon and/or reimbursed. An obvious element of financial control occurs if the payments are carried out in a regular time interval (e.g., monthly) and/or in approximately similar amounts.

The criteria of a relationship between parties includes elements indicating the nature of such a relationship – is this in fact an employment relationship? For example, does the paying agent pay remuneration for sick leave or vacation? To what extent is the work performed by the employee part of the regular business of the paying agent? How long does the work last, is the duration related to a specific project?

Not all criteria, nor all elements must be met at the same time. In order to establish the existence of an employment relationship; only the decisive influence of one criterion is sufficient. Depending on the particularities of certain work, employment may be proven also pursuant to criteria which are not stated.

Due to very widely prescribed criteria, as well as the possibility of establishing employment even without prescribed elements, it is clear that the Tax Authority has considerable discretion regarding this matter.

The Tax Authority published two opinions about implementing the described rules. In one, the Tax Authority states that in the activities of a management board member there are indicators of employment, even if he/she is not employed by the company. For the income of management board members, the “decisive influence of criteria are present already according to their obligations as stipulated in the Companies Act”. However, the opinion indicates that in a specifically different situation, as well as the possibility that a management board member does not carry out the work in a way generally determined by the Companies Act should be taken into consideration, hence this sort of income should only exceptionally not be taxed as employment.

Although the stated opinion focuses on management board members who are performing their function as a sole trader, in the second opinion the Tax Authority gives the same explanation for a situation where a management board member has concluded a service agreement with the company (based on which the income would be qualified as “other income”).

The Income Tax Act stipulates that a salary means, among other things, remuneration to a management board member who is providing certain work for the employer as an employee in an employment relationship pursuant to the law regulating employment relationships. The income from an independent activity means income from a sole trader, from equivalent activities, as well as income from liberal professions. Other income is accrued from income that is not considered earnings based on (among other things) employment or independent work.

It is apparent from the above that the income of a management board member who is not employed and has no sole trade is generally considered other income.

This is where we need to point out that taxes on income from employment and taxes on other income are taxable by the same progressive tax rates on an annual basis. The only difference is related to social contribution rates which are lower for other income.

Although it could be construed that payment of other income does not represent an organisational form taxable by lower tax rates (so there would be no illegal activity), we consider that “tax advantages” also include social contributions. In other words, public contributions are taxes and other public contributions pursuant to the definition of the General Tax Act. Other public contributions are also considered contributions, as well as all contributions that are determined, collected, and monitored by the Tax Authority.

The purpose of tax regulations is to establish income tax, and associated contributions correctly. After the elements of employment are determined, the Tax Authority must also calculate taxes, and contributions, as if there were no tax advantages.

We need to highlight that the employee is liable for additional taxes and contributions, but the paying agent is a guarantor, so the Tax Authority may collect the amount from any participant in a concealed employment relationship.

The described tax rules provide grounds and a framework for the Tax Authority to establish the substance of every relationship between the paying agent, and the employee, while the announced amendments to the Labour Law may additionally, from a labour law perspective, limit the work performed through digital labour platforms as yet another atypical, informal form of work.

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