Where does the Tax on the Income from a Dependent Activity Begin?

14. 10. 2015

There is a vast number of entrepreneurs who aim to decrease the expenses by "employing" others on a trade licence basis, believing that such a scheme will help them to eliminate their duty to pay the "employee's" income tax from a dependent activity. The results of findings of tax authorities topped with the additional tax assessment and respective penalties often come as a surprise; a rather unpleasant one, we should add. Since this kind of misconduct is often accompanied by breaking labour relations or even infringement of the Penal Code, an entrepreneur needs to exactly determine whether those who work for them are really entitled to be regarded as independent or need to be considered employees.Let us ponder on the following example for a while – a garage providing services for both physical and legal entities with two mechanics working there.

One of them, whom we can call, say, Peter, clocks in every morning, Monday to Friday, at 7, works in his "pit" mending cars that have been driven in, enjoys his half-an-hour lunch break at noon, at four o'clock heads home and is entitled to a four-week-holiday a year; his wages have been prearranged regardless on the number of cars he manages to repair. There is, I believe, not even a shadow of a doubt in anybody's mind that, whatever the contract between Peter and the garage manager, this scheme meets all the criteria of a dependent activity, and the employer is obliged to pay the corresponding tax.

Peter's brother, Paul, who also works for the garage, carries out different types of duties: he communicates with potential clients (mainly taxi drivers) of his own choice, aiming to win them for a long-term co-operation, checks the car repair reports, prepares data for the accountant and, occasionally, helps up Peter with some of the more complex repairs. He, too, works 45 hours a week, usually 7 to 4.30. His wages, however, are dependent on the number of new contracts signed and the profit of the garage.

One need not be a lawyer or a tax expert to see that Paul's job description is, effectively, a blend of both dependent and independent activities. Of course, if an employment contract has been made, the case is closed. On the other hand, if a different type of a contract has been entered into, especially one that appears to have features of an agreement between two entrepreneurs, the above-mentioned characteristics would not provide enough information as to the type of activity – whether it is one or the other. Questions concerning the contractual freedom or advantageousness of the contract for the weaker party would surely arise.

Therefore, it is quite clear that the definition and bounds of the dependent activity tax are quite vague, and in the end the tax authority is to have the final word in the assessment of each case. There is, in fact, one recommendation only at hand – entrepreneurs should always aspire to avoid this kind of problematic situations by performing an in-depth analysis of the contractual relationships with their business partners (i.e. employees and/or other persons doing business activities them) and making consequent amendments to the contracts. As the search for the most appropriate solution is often rather a complex issue, an expert advice might be valuable and since our office has a long-term experience in proceedings in both legal and tax aspects of the matter, we are ready and willing to help you.

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