Contracting services of individuals in Tajikistan
It is an often-considered option and even a matter of existing practice for an organization to hire individuals not as a staff but to use other service providers. This is especially the case for foreign companies and organizations and international organizations operating in Tajikistan. It may appear advantageous to use what for them may be a conventional approach, however, such options need take into account local context, legal framework and practice so that they can take an informed decision and preempt troubles.
Using services of the freelances in Tajikistan (e.g. interpreters) is a wide practice and is convenient from the standpoint of an organization hiring such services. There are no obligations which would usually arise were the organization acted as an employer by having an employment contract with the services provider. Thus, while hiring freelances in Tajikistan may be a better option in comparison to hiring an individual and making him a staff member, from the standpoint of taxation, these options do not differ from one another. Both the freelancer and an employee will cost to the organization the same amount of taxes. Payroll (social) tax will be the same, at 25% rate and, additionally, 1% will be deducted from the amount payable to the freelancer/employee. Individual Tax will be equally the same: 13%.
Apart from hiring an employee or a freelancer, there are other options for an organization to hire individual service providers: 1) hiring individual entrepreneur working under what is called ‘patent’ tax system (the “Patent holder”); (2) individual entrepreneurs working under what is called ‘certificate’ tax system (the “Certificate holders”).
These two options may be more attractive for an organization primarily for tax considerations.
The tax system under which an individual’s activity will fall (Patent Holder or Certificate Holder) will depend on the kind of activities involved. Government established the list of activities the engagement in which will automatically bring an individual into the realm of the patent tax system. This list is inclusionary, i.e. any activity, which is on the list makes an individual concerned liable to become a Patent Holder. Any activity which is not on the list makes an individual concerned liable to become a Certificate Holder. For both cases, an activity in question must be a regular activity of a person with an independent status. In other words, such activity, on substance, should not be that one would find in employment relationships.
There are other differences between the Patent Holder and Certificate Holder which has to do with the overall size of the income earned in a calendar year, ability to hire labor and some others.
Patent Holders are not required to submit tax reports. They are obliged to draw up an annual reconciliation act together with the relevant tax authority, before 1 March of the year following the reporting year. Certificate Holders have to submit tax declarations within 10 days of the reporting period (on a quarterly basis for simplified tax and on a monthly basis for social tax).
The below chart summarizes available tax system for each of the option.
Available options for tax purposes | Income Tax | Social Tax |
Certificate Holder | 6% (payable on gross income) | 1% (payable on gross income) |
Patent Holder | Up to 500 TJS | Up to 115 TJS |
Certificate Holder | 6% (payable on gross income) | 1% (payable on gross income) |
Employee | 13% | 25% +1% |
There are certain risks associated with the use services of Patent Holders or Certificate Holders. Tax authorities may scrutinize the Patent Holders’ or Certificate Holders’ relations with an organization to ascertain if the primary purpose of the use of these arrangements was to minimize its tax obligations. For these purposes they would consider if the organization was main hirer of the services and whether the primary income for the services received from the organization.
Also, if the relations between the organization and such services providers bear the characteristic of an employment relations. For example, it may appear that, as matter of fact or on the basis of the contract, Patent Holder of Certificate Holder should follow the organizations’ internal work regime and/or the services are continuously provided at the location of the organization, periodicity of payment of the rumination, and the treatment of such services providers similarly to staff members (e.g. internal pension or providence fund, provision of meals in the office, etc.).
If any one of the above tests is satisfied, tax authorities may recharacterize into employment relations and, as a result, the individuals would, for tax purposes, be treated as staff-members. In practical terms, such re-characterization may result in additionally assessed taxes for the relevant period (Individual Income Tax at 13% and Social Tax at 25% for the organization and 1% for a Service Contractor) and the penalties (interest and fines, more likely for the organization rather than for the Service Contractor).
Penalties may include the amounts of the taxes that would have applied should the relevant Service Contractors were local staff-members of the organization, for the actual period of provision of their services. Penalties may include default interest and fines. The interest rate is 0,05 % of the amount underpaid. A fine may amount to 11,000 somoni (appr. 1000 USD).