Tax and Legal Implications of Engaging Freelancers for Businesses in Kyrgyzstan

1) What are the tax risks for businesses when hiring freelancers instead of full-time employees?

When hiring freelancers instead of full-time employees, businesses should take into account the following tax risks:

• Fulfilment of tax agent obligations. When hiring external specialists to perform specific short-term tasks, the hiring party becomes the tax agent for the freelancer [1]. In the absence of employment relations, payment of income to an individual triggers the tax agent’s obligation to remit personal income tax as the income source. This obligation does not arise if the freelancer is registered as an individual entrepreneur or conducts individual labour activity on the basis of a patent.
  Failure to remit or fully remit the applicable tax may result in a tax penalty imposed on the tax agent in the amount of 10% of the unpaid tax and/or an additional charge for each full or partial month, capped at 50% of such amount [2]. 
• Reclassification of the relationship as employment. It is important to take into account that if the relationship between the parties exhibits characteristics of an employment relationship but is formalised through civil-law agreements, the relationship may be reclassified as employment, leading to administrative sanctions. For tax purposes, administrative liability may also apply in cases of tax evasion [3] and failure to comply with the requirement to maintain a tax-agent registry for hired employees [4].

2) How do tax authorities determine whether a freelancer arrangement should be reclassified as employment?

Tax authorities may conclude that the relationship should be reclassified as employment on the basis of the following:

• Review of tax reporting, specifically by identifying in the accounting records the systematic payment for services rendered by a particular individual;
• On-site inspections conducted as part of raid-based tax control over the proper registration of hired employees.

If the concealment of the actual number of hired employees is confirmed, the tax authorities will apply indirect methods to assess the tax liability using average monthly salary indicators.

The employer may also incur administrative liability for engaging individuals without executing an employment contract.

3) What are the employer’s withholding or reporting obligations when working with freelancers?

Since the payment of income to an individual who is not in an employment relationship with the company results in the company acquiring the status of a tax agent, the company is required to withhold and remit personal income tax as the income source.

The report must be filed for the tax period in which the tax obligation arose. With respect to personal income tax, the applicable rate is 10%, and the tax must be paid no later than the 20th day of the month following the month in which: 1) the income was paid; or 2) the income was received at the tax agent’s place of registration.

If the freelancer is registered as an individual entrepreneur or carries out activities on the basis of a patent, such reporting must be submitted by the freelancer independently.

4) Are withholding taxes applicable when engaging cross-border freelancers?

Yes, tax at the source of income in the Kyrgyz Republic is calculated and remitted to the budget by the tax agent, regardless of the form or place of the income payment.

5) How do double taxation treaties impact taxation of payments to foreign freelancers?

Where a double taxation avoidance agreement exists between the Kyrgyz Republic and the freelancer’s country of residence or citizenship, the amount of tax paid by the taxpayer in the foreign state is credited against the personal income tax liability in the Kyrgyz Republic, provided that such income is subject to taxation in the foreign state in accordance with the provisions of the relevant agreement.

Currently, the Kyrgyz Republic is a party to 37 double taxation avoidance agreements.

6) What compliance documentation should businesses maintain when working with freelancers?

Engaging a freelancer in accordance with the law requires the preparation and maintenance of the following documents:

• Properly executed civil-law contracts;
• Invoices evidencing the short-term and non-continuous nature of the engagement with the freelancer;
• An act or report on the work performed;
• Documents confirming the freelancer’s status as an individual entrepreneur or the payment of tax on the basis of a patent. In the absence of such documents, the company bears the obligation to pay tax on the freelancer’s income;
• Tax reporting on income tax from payments made to the freelancer, submitted by the company in its capacity as tax agent. If the freelancer is registered as an individual entrepreneur or operates on the basis of a patent, such reporting is submitted by the freelancer independently.

7) What compliance requirements must companies meet when engaging freelancers?

When working with freelancers, companies should consider the following aspects:

1. Structuring the relationship with the freelancer. Since freelancers are engaged for short-term or one-off projects requiring specialized expertise, the relationship must be formalized through civil-law contracts. It is important to ensure that the relationship does not effectively become an employment relationship, characterized by ongoing collaboration, regular salary payments, or integration into the client’s organizational structure.

2. Fulfilment of tax agent obligations when working with individuals who are not registered as individual entrepreneurs and do not operate under the patent-based taxation system.

3. Verification of the freelancer’s status. When engaging freelancers operating under a patent, it is necessary to ensure that the activities under the contract fall within the list of activities permitted under the patent and are carried out within the territorial scope of the issued patent. If the freelancer is an individual entrepreneur, it is also important to request documents confirming their tax registration as an individual entrepreneur.

8) What are the legal and contractual best practices for structuring freelancer engagements to minimize tax risks?

Tax risks for businesses engaging freelancers can be minimized through the following measures:

• Preparation and maintenance of documentation as outlined in the response to Question No. 6;
• Execution of civil-law contracts with mandatory provisions specifying the scope and duration of the work;
• Inclusion of the freelancer’s tax status in the contracts and assigning responsibility for fulfilling tax obligations to the freelancer - individual entrepreneur or freelancer operating under a patent;
• Ensuring that the freelancer’s performance of the contract does not exhibit characteristics of employment, i.e. the freelancer should not have a dedicated workplace at the company office, should not be subject to the client’s internal work schedule, and should not perform the work in a manner that would be considered employment under labor law.

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[1] article 201 of the Tax Code of the Kyrgyz Republic No. 3 dated 18 January 2022;

[2] article 164 of the Tax Code of the Kyrgyz Republic No. 3 dated 18 January 2022;

[3] article 308 of the Code of the Kyrgyz Republic No. 128 dated 28 October 2021, “Code of the Kyrgyz Republic on Offences”;

[4] article 308(1) of the Code of the Kyrgyz Republic No. 128 dated 28 October 2021, “Code of the Kyrgyz Republic on Offences”;

Authors: Aisanat Safarbek kyzy, Aibek Shamurzaev