Tax & visa aspects in the Czech Republic: Trade Licence and s.r.o.
You cannot decide between establishing a limited liability company (s.r.o) or obtaining a trade license (Živnostenské oprávnění) in the Czech Republic? Which option is less tax for you? -And what are the differences between these two options? You will find your answers regarding the legal aspects of S.R.O. and OSVC below:
Limited liability company (s.r.o.)
Visa
The principles of the free movement of labour in Europe apply to all EU, European Economic Area (EEA) and Swiss citizens alongside their family members working in the Czech Republic. Citizens from these countries can open a business easily if they have a travel document(passport) or ID card. However, all non-EU and non-EEA citizens must have a valid short-term/long-term visa or a residence permit in order to open a limited liability company. If you have a visa in the Czech Republic, you can apply for a residence permit for the purpose of business. Foreigners residing outside of the Czech Republic are required to provide more documents and are subjected to a more difficult & longer process. Therefore, it is recommended to come to the Czech Republic for a different purpose first (tourism, study etc) and then later consider opening a business.
Moreover, foreign business owners who would like to hire people from non-EU countries who did obtain education or did not live in the Czech Republic before need to also arrange employee cards for their new hires. The Employee Card is issued to persons who will be employed for more than 90 days, not more than 2 years. Each extension is made for no more than 2 years.
Taxes
The main taxes applied to companies in the Czech Republic are corporate tax, withholding tax, value-added tax (VAT), social security contributions, road tax and property tax.
| Tax | Tax Rate |
| Corporation income tax | Corporation income tax rate: 19%. |
| Personal income tax | Personal income tax rate: 15 % |
| The standard VAT | The standard VAT rate of 21 % – Applies to most products and services.
The standard VAT 15 % – basic foodstuffs, some pharmaceutical products, newspapers, some medical supplies, heating, social housing.
Reduced standard VAT 10 % – basic baby foods, some medicines, books, mill products and other products suitable for a gluten-free diet. |
| Property Acquisition Tax
Property tax |
On receipt of a new property, the buyer pays a fixed 4%.
The location of the property varies according to its type and purpose. |
Social and Health Insurance
Insurance paid based on the wages of the employees.
| Insurance premiums | Employer (%) | Employee (%) |
| Health insurance | 9.0 | 4.5 |
| Social Security Administration | 21.5 | 6.5 |
| Unemployment premium | 1.2 | 0.0 |
| Disease and other benefits | 2.1 | 0.0 |
| Total | 33.8 | 11.0 |
If you establish an s.r.o, you are not obliged to register for a VAT number, have an office address (can be virtual as well) and start bookkeeping.
Legal obligations
Establishing an S.R.O brings entrepreneurs a huge benefit in reducing the risks and effects of a failure.
As the name suggests, the partners are liable for the company only up to the amount of unpaid share capital. If the share capital is fully paid up, then in the event that the company is obliged to compensate the damage, it will not be possible to demand compensation for this damage from the partners.
Trade License (OSVC)
Visa
For people from non-EU countries, it is very important that they already hold a long-term visa or residence permit. It is a simple process if you hold a residence permit already and you would like to obtain a business license too. After collecting the required documents you need to register at the Trade License Office. If everything is okay with the documents you will get the free trade licence (OSVČ) in 5-7 business days, which will be valid for as long as your visa is valid.
If you do not have any valid visa, you better get prepared for the long process. You have to add all documents such as accommodation confirmation, seat location consent, bank report, proof of future projects and others. You have to apply in your country of origin or another country than the Czech Republic and get well prepared for an interview. You may get your free trade licence (OSVČ) even if you do not hold any visa but it won’t be active. In order to activate the license and start freelancing legally, you will need a residence permit.
Taxes
The trade licence holders need to have to pay for the health and social insurance (approx.5.000CZK / 180 Euro) every month and %15 income tax. The amount of total income tax will be counted from the annual closing.
Trade license owners are not required to keep accounts, only tax records.
The owner of the trade licence has to do their own taxes either every month or once a year using the flat rate (later is more beneficial) based on their income. This is often done using a 60/40 rule, which means you can claim a 60% expense deduction on your revenue (even if the real percentage is much lower). So, the remaining 40% of your invoiced amount is your tax base. On this tax base, only 15% income tax is calculated, and if applicable, tax deductions can be applied.
Comparative analysis
Tax optimisation
The big disadvantage of self-employed people is that, in addition to 15% of income tax, they have to pay social and health insurance for everything they earn. At the same time, social and health care cannot be deducted from taxes but paid by the freelancer. Although a legal entity pays 19% income tax, they have to pay social and health insurance only on wages paid to employees. If you are the sole owner of a limited liability company, without employees and as an executive, you work for your company for free, you do not pay social and health insurance. You have the opportunity to pay money out of the company as a profit from the company. This amount is further taxed namely 15% withholding tax. To sum up, as a self-employed person, you pay fewer taxes in general but establishing an s.r.o gives you a chance to optimize this process.
Legal obligations
Self-employed people need to be aware of some risks. Above all, their responsibility, when they are liable for any damage and business obligations with all their assets. The only thing they can do is file for personal bankruptcy but debt relief must be authorized by the court
Conclusion
Doing business through a limited liability company can be recommended especially if you are interested in creating value and building a brand in the long term that will not depend on the skills of a single person. Creating an S.R.O. may be more expensive at the beginning but in the long-term, it brings more benefits. For example, expanding the scope of your business and to retain the opportunity to transfer business to your children or business partner in the future will be much easier. Equally important, If you want to sell your company in the future, you would definitely need an ‘LTD’. Yeye Agency had enabled many foreign companies to start their operation in Czechia.
If you are doing business as a freelancer with a smaller budget such as being a designer, programmer, translator…etc it is probably for the best to obtain a trade license. YeYe Agency can advise and support you in every stage of decision making and implementing. With the help of an expert, you can decide what is the best option for you and ease the process.
