The September amendment to the KATA Act has fundamentally restricted this form of taxation. According to current estimates, only 100,000 of the 460,000 KATA-paying entrepreneurs will continue to be able to stay in the system, the rest will be squeezed out. Meanwhile, the amendment affects not only those subject to KATA, but also those who employ them. Below is a hand-picked selection of these effects.
Does the employer have to check whether its partner has opted out of KATA?
Under the amended law, a KATA-paying entrepreneur will have to declare if he receives income from a business, i.e., not from an individual. The effect of this is that the KATA-paying entrepreneur’s KATA status will cease on the day he earns income form a business and the income received will have to be declared under the entrepreneur’s personal income tax rules.
The employer has no responsibility in this respect, and does not have to check whether its contractor has opted out of KATA, whether he has made the declaration or whether he complies with his tax obligations properly. Nevertheless, in the spirit of business cooperation, the employer may wish to draw its contractor’s attention to these facts.
Can the employer pay in advance any fees due to the KATA-paying entrepreneur after September?
If the contractor provides services to the employer on a regular basis (possibly in return for a flat monthly amount) and invoices the employer in August for the fees payable for the following months, the invoice will, in substance, be considered as an advance invoice. If the invoice is issued before 1 September, the full amount of the invoice will be taxed under KATA rules – regardless of whether performance is made later.
If it is commercially acceptable for the payer to be invoiced before performance, it will not sustain any disadvantage. However, it is important that the parties adapt their contract to the thus agreed invoicing method – i.e. amend the agreement to specifically include the advance payment. Secondly, it is important to bear in mind that the agreement must not be fictitious. If, for example, the KATA-paying entrepreneur issues an invoice in August but the employer only pays the invoice month by month according to the original schedule, the tax authorities may reclassify the contract on the basis that the parties’ sole intention was to minimise tax.
Can I hire a KATA-paying entrepreneur as an employee?
Many businesses may need to hire their formerly KATA-paying contractors as employees from September onwards. In this case it should be noted that the tax authority is entitled to audit the last five years. In other words, if a KATA-paying entrepreneur becomes employed as an employee, a legitimate question may arise from the point of view of the tax authority: was the period prior to September also a disguised employment relationship?
It is, therefore, important in such cases to take another close look at whether the individual's employment as a KATA-paying contractor really met all the requirements of the KATA. On the other hand, it is not a bad idea to change the conditions of the individual’s employment at the time of the changeover: for example, if the KATA-paying contractor has so far worked mainly from home, he should come to the workplace from now on, or if he has worked on his own computer, the employer should now provide him with one, etc. It may also be worth introducing the changeover with a transitional period.