Tax and Legal Implications of Engaging Freelancers for Businesses in Turkmenistan
1) What are the tax risks for businesses when hiring freelancers instead of full-time employees?
The primary tax risk when hiring freelancers is the misclassification of authorities of freelancers as salaried employees instead of independent contractors. The Labor Code of Turkmenistan only covers legal relations involving employees. Independent contractors are covered under the Civil Code of Turkmenistan. If an individual works under internal supervision and labor schedules, receives regular remuneration determined by the employer, performs duties according to a specific job position and/or job description, and has working conditions provided under labor law (such as a workplace, tools, or paid working hours), they must be treated as an employee.
In case of misclassification, authorities can requalify the agreement as an employment relationship regardless of contract title. Businesses may be liable for back payment of personal income tax, mandatory social insurance contributions, unpaid employment benefits (leave, sick pay, etc.), plus fines and interest. Authorities examine the economic reality of the working relationship to determine whether these distinctive signs of employment are present.
2) How do tax authorities determine whether a freelancer arrangement should be reclassified as employment?
Based on Turkmenistan's Labor Code Article 17, tax authorities may determine whether a freelancer should be reclassified as an employee by examining four distinctive signs of an employment contract:
1. Accomplishment of Labor Function by Certain Profession/Position
Whether the worker accomplishes labor function by a certain profession, specialty, qualification, or position according to job descriptions, rather than providing services independently.
2. Subordination to Internal Labor Schedule
Whether the worker accomplishes obligations with subordination to the company's internal labor schedule indicates employer control over when and how work is performed.
3. Receipt of Salary According to Quantity and Quality
Whether the worker receives a salary according to the quantity and quality of work, and the complexity of the performed work, rather than fixed project fees or invoiced amounts.
4. Working Conditions Provided by the Labor Code
Whether there is availability of working conditions provided by the labor law of Turkmenistan, such as a workplace, employer-provided equipment, benefits, or protections.
If these signs are present in the working relationship, authorities are highly likely to reclassify the arrangement as employment regardless of what the contract states. This triggers back payment of income tax and social contributions that should have been withheld, payment of unpaid benefits like leave and sick pay, plus fines and interest. To avoid reclassification, it must be ensured freelancers work independently without job descriptions, set their own schedules, invoice for completed projects rather than receive a salary, and provide their own working conditions.
3) What are the employer’s withholding or reporting obligations when working with freelancers?
When working with freelancers in Turkmenistan, employer withholding and reporting obligations depend on the independent contractor's registration status. In case a freelancer is registered as an Individual Entrepreneur (IE), then employers are not required to withhold any taxes or make any reports to the government. IE is responsible for its own 2% income tax (Article 200(7) of the Tax Code of Turkmenistan). IEs handle all their own tax filings and payments.
However, suppose a freelancer is not registered as an IE. In that case, employers must withhold personal income tax in the amount of 10% (Article 184 of the Tax Code) from payments made to unregistered domestic individuals (physical persons) who are not registered as IEs. Tax withholding must be performed at the time of payment, and tax reporting is conducted monthly.
4) Are withholding taxes applicable when engaging cross-border freelancers?
Withholding taxes are applicable when engaging cross-border freelancers with Turkmenistan-sourced income. Employers must withhold 10% personal income tax from payments to foreign freelancers (Article 192(1) of the Tax Code). This withholding rate may be reduced or eliminated if the freelancer's country has a double taxation treaty with Turkmenistan, and a proper tax residency certificate can be obtained.
5) How do double taxation treaties impact taxation of payments to foreign freelancers?
Double taxation treaties can exempt Turkmenistan withholding tax on payments to foreign freelancers who are residents of a treaty state.
To be eligible for tax exemption or other tax privileges under a DTT, a non-resident taxpayer must submit two items to the relevant tax authority:
1. Application: A formal application for the exemption.
2. Residency Certificate: Official confirmation that the taxpayer is a resident of the treaty state during the relevant tax period.
This application and confirmation can be submitted either before the tax payment or within three years after the end of the tax period (Article 198 (2) of the Tax Code).
6) What compliance documentation should businesses maintain when working with freelancers?
When working with freelancers in Turkmenistan, businesses should maintain the following compliance documentation:
1. Written Service Contract
A comprehensive written agreement is essential and must clearly establish the independent contractor relationship. The contract should be drafted in compliance with the Civil Code of Turkmenistan, not the Labour Code of Turkmenistan. Furthermore, the service agreement must clearly state that the individual is an independent contractor, not an employee, and should define the services, payment terms, duration, termination clauses, and responsibilities.
2. Contractor Registration Verification
Businesses must verify whether the individual is a registered IE or an unregistered physical person, as this determines withholding obligations. IE registration from the contractor (i.e., Patent and Registration Extract) should be requested and retained on an annual basis.
3. Payment and Invoice Records
Contractors should provide professional invoices detailing services rendered and the amount due. Records of all payments made should be maintained, including dates, amounts, and payment methods (typically bank transfers).
4. Tax Withholding Documentation and Tax Returns
For unregistered individuals and foreign freelancers, records of the 10% personal income tax withheld from payments should be maintained. Businesses acting as withholding agents must file tax reports on income paid and taxes withheld.
7) What compliance requirements must companies meet when engaging freelancers?
Companies must meet several key compliance requirements when engaging freelancers, including proper contract classification, verification of contractor registration status, and fulfilling the company's withholding obligations. If companies registered in Ashgabat city are engaging independent contractors from different regions of Turkmenistan, they must verify the contractor's proper temporary residency registration or work authorization issued by government labour agencies (e.g., Ministry of Labor and Social Protection of the Population of Turkmenistan). Additionally, if the freelancer is registered as an IE and performs licensed activities, there may be requirements for business licensing on top of standard registration documents. Companies must also fulfill tax withholding obligations: no withholding for registered IEs (who pay their own 2% tax), but 10% withholding for unregistered individuals and foreign freelancers, with monthly or annual income tax reporting obligations. Proper structuring and documentation are essential to maintain the independent contractor relationship and avoid employment classification penalties.
8) What are the legal and contractual best practices for structuring freelancer engagements to minimize tax risks?
When engaging freelancers in Turkmenistan, companies must structure arrangements to avoid falling under Labour Code employment requirements by ensuring engagements are one-off projects with specific timelines (preferably not exceeding one year) and that contractors do not take up roles listed in the company's staff positions. Contracts should clearly outline the scope of services with detailed descriptions of work to be performed, payment terms specifying agreed-upon compensation, and term and termination conditions. The contract must demonstrate that the contractor controls how, when, and where work is done, uses their own equipment and workspace, and has the right to substitute another qualified person.
Authors: Mekan Bashimov, Annamenli Rozymyradova
