Start a business in Czech Republic step by step - for individual persons
Start a business in Czech Republic step by step - for individual persons
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Start a business in Czech Republic step by step - for individual persons
Whether you're upgrading from your employment to freelance or starting a business right after school, you have to expect a few administrative tasks.
In this article we will bring you most of them.
How to get a Trade License?
The majority of individuals doing their business under the Trade License. The process to obtain the Trade License is really simple. Just go to any Trade Licensing Office, complete a harmonized registration form and pay the administrative fee of CZK 1,000.
When completing the form, you choose the type of business. Most self-employed persons undertake based on the free Trade License for which is enough to meet the general conditions:
- the legal age, at least 18 years old
- criminal record
- full legal capacity.
But for some professions an evidence of professional competence (education and experience) is required besides the general conditions. We mean crafts, bound and licensed trades, which are defined in Annex 1 and Annex 2 and Annex 3 of the Trade Act.
Do you need the Trade License?
There are professions for which the Trade License is not required. Occupations like farmers, foresters, artists, lawyers or physician are governed by special regulations. Complete list of the professions can be found in Art. 3 of the Trade Act.
But it does not mean that you should start your business without any registration. For example the farmers shall be registered at the Municipal Office and in Register of Agricultural Entrepreneurs, lawyers must be registered at Bar Associations etc.
The practice is even such that many individual entrepreneurs establish their Trade License even though it is not required for their profession. Under certain circumstances it could be an advantage - perhaps the most enticing is the possibility of applying higher lump-sum expenses (see below).
"Trade certificate" you do not get in paper form
The completed harmonized registration form at the Trade Office can automatically register you at the Tax Office, Health Insurance Company and Social Security Administration. You can be also register voluntary for VAT or road tax.
Trade certificate you already do not get in a paper form. Within a week from the announcement you will receive only an extract from the Trade Register where you can learn also your business ID. Within a month you will get also letters from Tax Office, Social Security Administration and Health Insurance Company informing you about the terms of payment and other details.
What will you pay?
If the undertaking is your main activity then you will have to pay some minimum prepayments of health and social insurance already from the first month of your business. In year 2017 get ready for the monthly payments in the amount of CZK 1,906 for health insurance and CZK 2,061 for social insurance.
The insurance is always paid retroactively for the previous month. Health insurance shall be paid not later than 8th day of the next month and social security, shall be paid not later than 20th day of the next month.
After the first filing of annual statements for health insurance and social security and income tax return you will have to make additional payment of difference between calculated obligation and sum of your prepayments. Depending on your income you will have to make also a new calculation of prepayments for the following year.
Social insurance amounts 29.2% of the assessment base, health insurance amounts 13.5% of the assessment base and income tax amounts 15% of the tax base.
Assessment base is 50% of your profit.
How to reduce the charges?
The amount of income tax and insurance is affected by the amount of profit (i.e. tax base). Keep tax records (i.e. single entry accounting) and therefore keep all contracts, receipts, invoices and bank account statements related to your business. The documents can be declared as an expense.
Or you can choose to apply fixed expenses as a percentage of income – widely known as “lump expenses”.
To apply expenses as a percentage of income is a great tool for individuals who have small costs from the nature of their business. Normally you would tax almost whole profit. But when you apply fixed costs, your profit will be virtually decreased by fixed percentage without the obligation to prove your real costs (i.e. receipts or invoices).
How much you can reduce your income?
- for 80% and a maximum of CZK 1,600,000 if you work under craft Trade License or work in agriculture, forestry and water undertaking,
- for 60% and a maximum of CZK 1,200,000 if you undertake under other kinds of Trade Licenses,
- for 40% and a maximum of CZK 800,000, if you do a business on the basis of special regulations and therefore do not have Trade License. This applies to lawyers, artists, writers, etc.
- for 30% and a maximum of CZK 600,000 if your income comes from lease of property.
So for example your income for the year 2016 will be one million crowns and you undertake under a standard Trade License. You are entitled to reduce your profit (and the same tax base) for CZK 600,000 virtual expenses which are not necessary to justify in any way.
Your tax base will be in this case only CZK 400,000 and your assessment base for insurances will be CZK 200,000.
But if you claim lump sum expenses, you can not apply at the same time the tax relief for your spouse who’s income amounts up to 68 000 CZK per year nor can you claim a tax relief for children.
However, nothing prevents your partner to apply these tax benefits.
Transition from applying real expenses to using the lump sum between particular years is a topic for consultancy with a tax advisor.
In April 2017 the Income Tax Act amendment will come into force, which reduces the maximum limit of lump sum expenses starting by the year 2018. In terms of the amendment you may decrease your income as follows:
- for 80% and a maximum of CZK 800,000 if you work under craft Trade License or work in agriculture, forestry and water undertaking,
- for 60% and a maximum of CZK 600,000 if you undertake under other kinds of Trade Licenses,
- for 40% and a maximum of CZK 400,000, if you do a business on the basis of special regulations and therefore do not have Trade License. This applies to lawyers, artists, writers, etc.
- for 30% and a maximum of CZK 300,000 if your income comes from lease of property.
On the other hand you will be entitled to apply a tax deduction for a spouse who’s annual income amounts up to CZK 68,000 and a tax relief for children.
Year 2017 is a period of transition in which you can:
- apply the lump sum expenses valid in year 2016 assuming that you will not claim a tax relief for spouse and children at the same time
- apply new lump sum valid from the year 2018 and simultaneously claim a tax relief for spouse and children.
When to file tax returns?
The only greater administrative issue of an entrepreneur is the obligation to file tax returns for the previous year. Your income tax return be must filed at Tax Office no later than at the end of March.
The statements for health insurance and social security can be filed a month later, by the end of April. If you use the services of a tax advisor, the two periods will be extended for additional three months.
The forms can be submitted in person, by mail or electronically. Depends what is more convenient for you.
Finally a few tips
Provided that you have an annual turnover up to one million crowns, consider whether it will be profitable to use the lump sum expenses.
Provided that you exceed the turnover of one million crowns in the 12 consecutive months you become obligatory VAT payer.
Every VAT payer must once a month (or once a quarter) file VAT return and a Control Statement.
Provided that as a VAT payer you provide services or sell goods into other EU countries, you will have to additionally file Summary Reports (ESL).
Provided that as a VAT non-payer you provide services into other EU countries or buy services from a non-EU country, than you become Person Identified for VAT with the obligation to file VAT returns and pay the VAT from the supply in the Czech Republic.
You will become Person Identified for VAT also when purchasing goods from other EU country worth over CZK 326,000 or use the supply of goods with installation or assembly from a foreign entity.
Helpful links:
Electronic forms for Tax Office
Electronic forms for Health Insurance Companies
Electronic forms for the Social Security Administration
Article compiled:
Ing. Michael Hajek
tax consultant from the company BELL consulting Ltd.
http://www.bellcons.cz/
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