BUSINESS REVIEW – The new criteria for the fiscal evaluation of the independent activities performed by self-employed individuals

Article în Business Review – July 2015

Luisiana Dobrinescu, Tax Partner, DOBRINESCU DOBREV SCA

TAX LAW DSC_0302_resizeLaw no. 187/2015 for amending the Fiscal Code, recently published in the 07 Jun 2015 Official Journal no. 499 rephrases the rating standards based on which a certain activity may be treated as either independent or dependent. The legislator set up seven criteria, sufficiently unclear as to cause further discomfort to many taxpayers.

An activity carried out by an individual is rated as independent if at least four of the following criteria are met:

  • free choice to render the activity, to set up the work schedule and the work place;

  • free choice to carry out activities for several clients;

  • taking by the individual of the inherent risks of the business;

  • making use of the individual’s own working capital;

  • contribution of the individual with his own intellectual or physical work , as the case may be;

  • the individual being part of a professional body/order having by law statutory and regulatory role for the profession;

  • the individual having free choice to carry out activities directly with employed personnel or by contracting third parties.

It can be easily observed that the text refers to the freedom itself of the individual in performing a self-employed activity, in scheduling his tasks, in serving more than one client etc.

Therefore, we may conclude upon scrutinizing these rating standards from the legal standpoint, that in theory most of the authorized individuals (mainly liberal professions) could easily meet the criteria, so long as they refer to the general freedom to organize the activity, whereas in practice some of the criteria may be challenging for the individuals (for lack of several clients, for instance), notwithstanding the basic statutory freedom to self-organize an independent profession.

However in fiscal matters the principle of economic preeminence is supposed to prevail over the legal form. For example, concerning the seventh criteria referring to the free choice to carry out activities, directly with employed personnel, or by contracting third parties, one may wonder if a professional who chooses to hire no extra staff (a tax consultant, for instance) implicity waivers the freedom to self-organize his activity and thus fails to meet the criteria.

Another example is related to the third criteria: the inherent risks are assumed by the individual carrying out the activity. What are these inherent risks? The only one we can think of is that of the risk to have the contract terminated, in case of failure to carry out adequately the services. Can there be other risks? How can one prove that the individual assumes such risk, other than by stipulating as such in the contract (rather unnecessarily, from the legal standpoint)?

In other words, is it enough to simply change the wording of the service supply contracts by clearly stipulating these freedoms, in order to avoid the fiscal reclassification?

In our opinion, without having further guidance in the interpretation of new text of the Fiscal Code (through methodological norms or by means of other secondary legislation), it is quite difficult to eliminate the risks of a fiscal reclassification.

Significant implementation problems may occur when a self-employed individual is himself aware that such standards of independence are not met in his case, or he simply cannot or would not assume the risk of an adverse interpretation: his own remuneration would become subject to income tax and social contributions as salary pay and his business would be liable to withheld and pay to the state budget the above mentioned taxes, while he would be utterly unable to reorganize and unregister itself as an independent professional. One and the same activity would thus risk a double taxation, both as incorporated business (employer) and as authorized individual.

The undesired conclusion is that, at this moment, neither the individuals nor the legal entities – beneficiaries of the services provided by the individual – cannot, by themselves, be fiscally reclassified, at the same time maintaining the status of authorized individual. Such conclusion faces the individuals running a risk of fiscal reclassification with making a decision to incorporate and hire themselves under an individual labour contract under a completely different civil and fiscal environment.

One always must keep in mind that certain professions (lawyers for instance), reject the existence of an individual labour contract, which is incompatible with the statutory regulations of independence.

Also, certain liberal professions (lawyers again) have their own social insurance system, which is not supervised by ANAF. The legal profession would never be made liable to pay employer contribution to the state-run pension fund.

In our opinion, the new law largely misses its target for lack of instruments to have it properly implemented on a practical level in a multitude of cases.

To conclude, an independent professional faces now two basic options:

– to take the risk of later fiscal reclassification for unmet independence criteria, since more often than not, they are either incompatible or impracticable with regard to the independent professional regulations or

– to renounce, whenever possible, to the independent professional status, and incorporate the business and hire himself under a labour contract in order to be able to voluntarily collect and pay the salary taxes and contributions.