Inside the European Union, the old Soviet Bloc has a whole host of pleasant surprises in store for the most daring entrepreneurs. For instance, there’s the Czech Republic, which offers some great opportunities for freelancers.
If you’re an entrepreneur and are thinking of moving to the Czech Republic, you doubtless want to settle down in the capital, Prague, which is a fairly expensive city.
You shouldn’t, however, make the mistake of establishing a Czech capital company, the S.R.O. Although these are better than a limited company from a tax-technical point of view, the 19% corporate tax is fairly high, and is also accompanied by other taxes and social contributions that reduce salaries and dividends.
Instead, for residents in the Czech Republic, there’s a special tax scheme that is similar to that applied to freelancers in Spain, but is much more advantageous. Known as a Trade Licence, it offers a highly reduced tax burden up to a certain sales volume.
Although recent modifications have made this tax scheme less attractive than in the past, the good times aren’t over yet. Similarly, the Czech Republic as a country has a lot to offer young freelancers and entrepreneurs who don’t earn much money yet.
If you earn less than 2 million Czech koruna a year (equivalent to €74,000), the Czech Republic is a very appealing option to register as a freelancer in.
The maximum tax burden, including both taxes and contributions to social security, comes to 15%. In other words, you’ll have €62,000 left after taxes, which corresponds to a considerable net monthly income of over €5,000. This is a sum that will allow most freelancers to live for years in comfort with a tax residence in the Czech Republic.
Due to recent changes to legislation, from the magical limit of 2 million koruna, the tax advantages become a lot less advantageous.
Beyond this limit, the beneficial Trade Licence tax scheme is no longer applied, and the Czech solidarity tax of 7% is applied on income of 2.4 million koruna.
Nevertheless, even those with large income may choose to maintain their residence in the Czech Republic, as we’ll explain a little later on.
Taxation and the Czech Trade Licence
As we mentioned, the Trade Licence (Živnostenský) in the Czech Republic is similar to the commercial activity register for freelancers in Spain. This licence allows you to carry out 80 different activities, which encompass practically everything you could imagine. The application process is simple; you only have to show your qualifications in a few specific cases.
All you need is to have completed training or university studies in banking and finance services, medicine, massage, food preparation, or the hotel and restaurant sector.
The classic business models for digital nomads, such as imports and exports (also with FBA), consulting, IT, translation, and other activities, don’t require any kind of qualification.
Nevertheless, the difference between holders of a Trade Licence and their counterparts in Spain is that the former can benefit from a very advantageous special tax system.
To be specific, we’re talking about the 60/40 rule. According to this rule, 60% of sales volume is excluded from the tax burden calculated from combined taxes and social contributions. This means that only 40% of the sales volume is used as the basis for calculating the sum that is taxed at the normal income tax rate of 15%.
The Czech Republic has a fixed tax rate of 15%, regardless of income level. An additional 7% “solidarity tax” is added to this rate on income up to 2.4 million koruna.
In the Czech Republic, you don’t pay taxes as a freelancer on income up to 400,000 koruna, or €15,000.
In this way, holders of a Trade Licence in the Czech Republic pay a maximum of 6% tax (40% of 15%) on profits of almost €74,000. However, bear in mind that if you make use of this deduction, you lose the right to take advantage of most other potential deductions. You would only be able to further reduce your tax burden through strictly defined deductions, in the case of children, certain insurance schemes, and interest repayment.
As a general rule, the overall deduction of 60% of operating expenses is a better option for most digital entrepreneurs. Online businesses and activities that are carried out by freelancers don’t usually entail big expenses.
Of course, if your business expenses are greater than the tax advantages of this fixed 60% deduction rate, you can also opt for a 15% tax with all expenses deducted.
VAT in the Czech Republic is currently 21%. Furthermore, the regulation of small businesses in the Czech Republic is fairly appealing. For example, you can apply for a European tax identification number, and if your sales volume is under €37,000, you won’t be required to collect VAT. In other words, if your income is under €3,000 a month, the Czech Republic has all the advantages you could need when beginning your activities as a freelancer.
Social contributions in the Czech Republic
In countries in the European Union, taxes are only one side of the coin. It is often social contributions (to social security) that demand the most money. And ultimately, in the Czech Republic, you pay more in social contributions than in taxes.
More specifically, at the time of writing, you must pay monthly minimum contributions of 2,061 koruna to social security and 1,907 koruna to public healthcare, always in advance. In total, this comes to 4,000 koruna, i.e. €150.
These minimum social contributions are applied throughout the first year of the Trade Licence. After the first year, social contributions are calculated according to your profits in the previous year, and correspond to 5.8% of your sales volume. You also have to pay an additional 2.7% for medical insurance.
Together with the effective 6% tax rate, the total charge comes to a maximum of 14.5% of your gross sales volume.
However, remember that this is only possible on sales volumes of up to €74,000. Beyond this threshold, both the tax burden and social contributions increase considerably.
Alternatives if you earn over two million koruna a year
Starting from a sales volume of two million koruna, i.e. €74,000, it’s no longer a good idea to limit yourself to the special Trade Licence tax system.
Since you lose the 60% deduction on all sales that exceed this figure, not only do taxes increase, but social contributions do too, by a factor of 2.5. With a total charge of approximately 36%, you would still surely pay less than in other European countries, but after this point it’s worth thinking about moving to a country with better tax advantages. With a net monthly income of more than €5,000, the world is your oyster.
Czech legislation also lets you remain in the country as long as you don’t make the mistake of somehow “managing” the income that exceeds the limit of €74,000 a year through the Trade Licence.
Instead, you can simply set up a company abroad in a country that doesn’t tax foreign income, and leave the remaining profits in this company, or deduct them by including them as foreign company expenses.
This is possible because the Czech Republic is currently one of the EU countries that, unlike Spain, don’t have international tax laws (CFC rules). Consequently, there are no obstacles to managing a tax-free offshore company from the Czech Republic and using it to earn money.
You only have to avoid assigning yourself money directly as a salary, because you then have to pay the corresponding additional charges. The best idea would be to transfer the sales to the foreign company, use them to invest, and deduct as many private expenses as possible on behalf of the company.
In the framework of the BEPS initiative, international tax laws must soon be introduced in every EU country. It remains to be seen in what measure they will be implemented in the Czech Republic. For now, even business owners with high income can continue to benefit from the tax advantages there.
In spite of this, many freelancers and small business owners take a fairly long time to reach the €74,000 turnover, if they ever achieve it at all. This makes the Czech Republic the perfect long-term residence for anyone who is sick of taxes in their country of origin.
Besides the Trade Licence, there is an unlimited 40% deduction on intellectual property, such as books and software. In other words, if you have licence fees, you’ll never pay more than 9% tax on them, even if you earn over 2 million koruna.
How can I apply for a Trade Licence?
Obtaining a Trade Licence isn’t especially complicated, so you can do it on your own if you choose. Of course, it would be much easier with the help of my in situ partner agency. The most important thing is to have legal residence in the Czech Republic, which is no problem thanks to freedom of establishment for EU citizens.
You only have to register as an EU citizen at the police station that corresponds to your new domicile, which requires you to have valid health insurance, a rent contract or property, and minimum income of just under €300 a month. If you fulfil these requirements, you can obtain residence and apply for your Czech Trade Licence.
It’s important to bear in mind that you have to register for a Trade Licence using a business address. There’s no reason why this should have to be identical to the private domicile you’ve chosen as a residence.
Because of this, it’s generally recommended that you present your application for a Trade Licence in the capital, Prague, even if you live somewhere else. This is because lack of experience and the language barrier could pose a problem in Czech offices outside Prague.
If you don’t want to rent a physical workplace in Prague, you can easily rent an affordable virtual office through my partner agency in Prague (for €20 to €40 a month), which you can then use as your business address.
The cost of applying for a Trade Licence is fairly low, which makes the Czech Republic a good option even if you have modest income.
Residence for EU citizens and the Trade Licence application comes to around €500. Besides the €20 to €40 a month needed for the virtual office in Prague, you also have to factor in expenses of approximately €40 to €60 a month for accounting and tax advice.
In spite of this, the Czech Republic offers some extremely attractive possibilities for young entrepreneurs who want to take their first steps in more attractive conditions than in their country of birth. Moreover, it’s no secret that the country has much less economic regulation than others like Spain, Italy, and Germany.
There is no minimum stay needed to obtain residence in the Czech Republic; as with Spain, tax residence is available with a permanent home. You can therefore spend a few weeks of the summer in the Czech Republic and the rest of the year somewhere else in the world, while subletting your home and using it as an additional source of income.
If the opportunity to take up residence in the Czech Republic has grabbed your attention, we can help. My partner agency in Prague will take care of everything you need to transfer your domicile and request your Trade Licence. Feel free to get in touch.
Because your life belongs to you!