Employers Will Benefit from Engaging Retirees

Retirees’ earnings from work under contracts for services, thus outside of their pension, will not be subject to contribution payments starting January 1. Only 25 percent income tax will be calculated from the gross earnings.

Written by: mr. sc. Marija Zuber, advisor-editor at the magazine Accounting and Finance
[email protected]

As of January 1, 2009, the new Law on Contributions comes into effect, regulating the obligation to pay contributions for mandatory social insurance for all categories of insured persons in pension and health insurance. The law regulates the contributors to the payment of contributions and prescribes rates, deadlines, and other issues related to the method of determination, payment techniques, and control of the settlement of this form of mandatory public levies. The most important novelty introduced by the Law on Contributions is the exemption from paying contributions on the second income earned by retirees. The exemption is introduced without amount limitations and regardless of the legal basis on which the retiree earns the second income.

Thus, earnings from the second income that retirees earn from work under contracts for services, as members of supervisory boards, management councils, and other similar bodies, as acquirers, agents, or on any other basis, will not be subject to contribution payments starting January 1. Only 25 percent income tax and possible surtax will be calculated and withheld from the gross earnings. It is estimated that this new relief will cover between 40,000 and 50,000 current pension beneficiaries who earn additional income alongside their pension.

No contributions will be paid on the earnings that will be paid to retirees, neither for pension insurance, which according to the law burdens the income recipient, nor for health insurance, which is calculated as a contribution on the basis and burdens the payer. Assuming that the previously agreed gross second income remains unchanged after January 1, 2009, the tax base will be slightly increased because there is no obligation to pay contributions for pension insurance, which reduces the base for calculating income tax, but the net amount of the second income paid to the retiree will still be higher. Income tax continues to be paid at a rate of 25 percent.

Free Negotiation of Compensation Amount

This method of sharing the benefits of new fiscal exemptions, whereby the exemption from paying contributions from income is directed in favor of retirees, and the exemption from paying contributions on the base is in favor of the payer, is not mandatory. Earnings that retirees earn based on the second income have a legal basis in mandatory law that allows contracting parties to freely negotiate the amount of compensation for work or services delivered based on a contract for services or some other named or unnamed contract. Contracting parties can determine the amount of compensation in gross or net amounts, either for the entire completed job or by months, by days, as a percentage of some amount, per piece, etc. When negotiating the amount of compensation after January 1, it will be particularly important for both contracting parties to know the insured status of the recipient of the second income, as this depends on the fiscal burden of their earnings.

When it comes to compensation that retirees will earn as members of certain bodies, where their compensation is regulated by a tariff or decision of the competent authority, those bodies may be encouraged to reconsider the method of determining the tariff (for example, retirees appointed as jurors, members of supervisory boards, management councils, or other corresponding bodies of other legal entities, members of representative bodies in local government units, etc.). If the amount of compensation is determined uniformly for all members of a certain body, regardless of whether the member of that body is a retiree or not, the compensation determined in gross amount will result in a higher net payment to the retiree compared to other members of the same body. Conversely, when the compensation is determined at the level of net income, the recalculation to gross amount will not be the same for retirees and for persons who do not have the right to exemption from paying contributions when receiving second income, so the total costs for the payer will be lower for the retiree compared to other members of the same body. This new way of regulating mandatory contributions could prompt the competent authority or body to discuss the justification of a uniform tariff for all members of the same body.

Exemptions Only for ‘Real’ Retirees

Regarding the application of this new fiscal exemption, it should be emphasized that the definition of a retiree has been narrowed according to the Law on Contributions in relation to pension regulations and in relation to income tax regulations. According to the Law on Contributions, a retiree is considered to be a person who is a pension beneficiary and is not simultaneously in an employment relationship and does not perform self-employment. If it is a person who is half-time retired and the other half in a part-time employment relationship, that person is not considered a retiree under the new contribution payment regulations.

Namely, users of disability pensions due to professional incapacity for work can be in an employment relationship with full or part-time work and/or perform self-employment alongside their pension, but their pension is then paid reduced compared to the amount of pension they would be entitled to if they were not in an employment relationship or did not perform self-employment. They are not subject to the exemption from paying contributions on income from the second income. The regulation on contributions for mandatory insurance will prescribe the documentation that the recipient of the second income submits to the payer to prove the status of a retiree (pension decision or appropriate confirmation from the Croatian Pension Insurance Institute). The payer of the second income who frequently pays earnings to the same retiree will not have to obtain a new confirmation for each payment, but it will be sufficient for the retiree to prove their retiree status once a year.

Transitional Provisions

The new exemption from the obligation to pay contributions on the second income earned by retirees will motivate payers to contract the payment of fees and other compensations for days after January 1, regardless of when the delivery of the work or the job for which the second income is paid was performed. Namely, the transitional provisions of the Law on Contributions state that in cases where the obligation to pay compensation to the retiree arose in 2008, and the payment is made in 2009, mandatory public levies should be calculated according to the regulations that were in force in 2008. This means that in the first months of 2009, there will still be payments of second income to retirees on which mandatory contributions will be calculated and paid.

Therefore, it is in the interest of the contracting parties to contract the obligation to pay for the period after January 1, 2009, if they want to take advantage of the new benefits of exemption from mandatory contributions. Even after the transitional period, there will be difficulties in determining the correct application of this regulation. In cases where the work was delivered at a time when the person was not a retiree, and the payment is made subsequently, after the person has retired, the question of the correct application of the regulations arises. Detailed instructions on these issues should be regulated by the Regulation on Contributions for Mandatory Insurance, which will be published in January 2009.

No Exemption from Contributions for Rental Income

According to the new Law on Contributions, individuals who earn income from property and property rights, either by their decision or by force of law, determine their tax obligation based on business books, and as of January 1, 2009, they become obligated to pay contributions. We remind you that individuals who are VAT payers are also required to keep business books for income from property just like craftsmen or self-employed individuals. Landlords who are not in the VAT system, although they have no obligation, can choose to determine and pay income tax based on business books. Likewise, landlords can pay corporate tax instead of income tax.

The new Law on Contributions introduces the obligation to pay contributions on income from property for which they keep business books, either according to income tax regulations or according to corporate tax regulations. No exemption has been prescribed for retirees regarding this new burden in paying public levies. Given that they are registered in the register of income tax payers, their status as insured persons in mandatory pension insurance should be re-established by law after January 1, 2009. After their status as insured persons is established, according to Article 90 of the Pension Insurance Act, their pension payments will be temporarily suspended while this circumstance lasts. Currently, there is no data on how many retirees will be placed in such a legal position, nor are there any announcements on how the Croatian Pension Insurance Institute will act as the pension payer.

Comparative Overview of Contribution and Income Tax Calculation When Paying Second Income to Retirees