You have a great business idea, but you don’t know how or where to offer your services? You have two main options: establishing a limited liability company or obtaining a trade license. Which option means less tax for you and which country has more offers? – And what are the differences between these two options?
You will find your answers regarding the legal aspects of a Limited Liability Company and Trade License in the Czech Republic, Slovakia, and Germany below:
In all three countries, you need something called a Trade License to be able to work as a freelancer. In the Czech Republic and Slovakia, the name is the same OSVC (Živnostenské oprávnění). In Germany, there are two different types of self-employment.
Freiberuflich (Freelancer) – only people with the ability to do work from a comprehensive list of several professions can be entitled. The list of such occupations include scientists, scholars, teachers, artists, reporters, doctors, dentists, programmers, translators, consultants, lawyers etc. According to German law (EStG § 18).
Gewerbetreibende (businessperson/tradesperson): If you have a commercial profession that is not in the official list of freelancer jobs. Freiberuflich is a relatively more accessible version of self-employment in Germany since it does not require registration of business.
For people from non-EU countries, it is essential that they already hold a long-term visa or residence permit, and this condition applies in all three countries. Citizens of the EU, Switzerland, Norway, Iceland, and Liechtenstein can work in Germany (same for CZ and SK) without a freelancer visa/residence permit. Upon the start of their practice, they need to register at the Foreigner’s Office and also meet other legal requirements to become self-employed. Foreigners from other countries will need to obtain a residence permit/long-term visa and proceed with next steps to freelance legally. 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, confirmation of professional ability: for example, a licence proving your expertise in law, previous work – examples of your previous freelancing experience, and letters from your potential future employer/customers – to prove that they will need your services etc. 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.
The next step to take when starting a freelance job is paying taxes and handling other fees.
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.
Taxation in Slovakia
When paying taxes, the first step is to identify whether the licence owner is a tax resident in Slovakia or not. The people who have permanent residence in Slovakia need to pay taxes in Slovakia on the income they receive both in Slovakia and abroad. It also depends on the international agreement Slovakia has with the country of citizenship of the applicant in order to prevent double taxation. Non-tax residents with a trade license issued outside of Slovakia need to pay taxes only if they have permanent business premises in Slovakia. Their income is not taxed according to the Slovak law if they do not have business premises.
The income tax in Slovakia is levied at two different rates of 19% on income below 35,022.31 euros and 25% if it is above that level.
The trade licence owners need to submit a tax return for the previous year, by March 31. However, the deadline can be prolonged by 3 months if they receive income also from abroad.
Self-employed persons can apply flat-rate expenses amounting to 60% of their taxable income up to 20,000 EUR per year.
Social Security and Health Insurance
After obtaining the trade license, you will be required to pay for public insurance and register at the Social Insurance Agency after 1 year of activities. You can be registered in one of the public insurance companies in Slovakia (Všeobecná zdravotná poisťovňa, Dôvera, zdravotná poisťovňa) by the Trade Licence Office directly. Obligation to pay social insurance depends on the income after it reaches the required limit of 5,298 euros. The minimum rate for sole traders is around €70 a month.
Your obligation to pay social insurance depends on the income earned in a particular calendar year. This obligation arises the year following the calendar year in which your income reached the required limit (currently €6,078). If your income in a particular calendar year reaches this limit, you are obliged to start paying the social insurance from July 1, the next year, as well as register yourself as self-employed in the Social Insurance Agency by July 9.
Freelancers are exempt from paying the trade taxes in Germany, but they are still subject to the income tax and the VAT (Value added tax).
The base rate for income tax is 14% in Germany, but the tax amount can go up to 42%. A solidarity charge of 5.5% is also included in this tax. You pay the income tax based on your yearly commercial activity. Solidarity tax is paid quarterly. Freelancers that make less than €9,169 are exempt from the income tax. The VAT tax can be from 7 % to 19% depending on the services the freelancer is offering. If your annual income is not over 17,500 € you do not need to charge VAT to your clients.
Germany has an electronic system called “ELektronische STeuerERklärung – ELSTER” or electronic tax declaration for freelancers to declare personal income and pay taxes.
Social Security Fee
Freelancers also need pay for Social Security if their net monthly income is over 450 euros. The rate of about 18% but during your first year as a freelancer, you can ask for a 50% discount.
Health Insurance Cost for Self-Employed Individuals and Freelancers in Germany. Getting health insurance that covers the whole period they need is also one of the most important steps. The cost of health insurance for self-employed individuals and freelancers largely depends on their income and if it is public/private insurance. Whether public or private, make sure you choose the health insurance for you. Regarding the cost of the public health insurance, the monthly minimum income of the freelancer is assumed to be approximately €1038.33. So even if your income is lower than this amount, you will still pay as if you are earning €1038.33. This means that self-employed individuals and freelancers pay a minimum of 160€ to 190€ per month.
Freelancers also need to open a bank account in a bank in Germany and obtain a tax ID from the Tax Registration Office (Finanzamt). The unique tax identification number will be used by you to make a charge for your services from the clients and also by the tax office to collect taxes.
|Criteria||The Czech Republic||Slovakia||Germany|
|Social Security||Combined with Health Insurance||35%||18%|
|Health Insurance||5,000 Kc(180 EUR)||70 EUR||160-190 EUR|
|Tax Optimisation||Only 40%of the income is taxed||Only 40%of the income is taxed||Also Flat rate on net income (Exempt from paying trade tax)|
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 most popular form of a company in the Czech Republic, Slovakia, and Germany, entrepreneurs choose to start their business, is the limited liability company. It has a strong international reputation due to the raising of capital and entry in the commercial register. Furthermore, the shareholders are liable solely with the assets of the company while their private assets remain untouched.
In the Czech Republic and Slovakia, the limited liability company is called an S.R.O. In Germany, the future business owners have two options to establish an LLC; UG and GmbH forms of business. The GmbH is opted by future business owners with a share capital of at least 25,000 euros per company and exactly half of this amount, 12,500 has to be deposited. The UG form, also called a mini-GmbH ,is ideal for entrepreneurs with limited budgets. You could register your business for as little as 1 euro per share (however 1,000 euros and more is recommended).
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.
|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 |
|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 (%)|
|Social Security Administration||21.5||6.5|
|Disease and other benefits||2.1||0.0|
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.
Taxation in Slovakia
In general, an SRO will be subjected to the Company Law and must comply with the tax residence requirements imposed in Slovakia.
The following are the taxes must be considered when registering an SRO in Slovakia:
Social Security and Health Insurance
You need to register with pension, sickness, and disability insurance and unemployment insurance at the local social insurance company (Socialna poistovna) Agency: Local social insurance company and all of the health insurance companies at which their employees are insured.
The combined rate for the employee’s social security and health insurance contribution is 13.4% of their assessment base, and
the employer’s contribution is 35.2% on the basis of the gross salaries.
Below, we list the main taxes for limited liability companies in Germany:
– Corporate income tax: 15%, applicable to the worldwide income of a limited liability company in Germany; however, the effective rate is higher because other taxes add to it; in practice, it can range between 30 and 33%.
– Trade tax: this type of tax varies and has a value of 14 to 17% in major German cities.
– VAT: the standard rate of 19% with a reduced rate of 7% and the exemption for some types of transactions.
– Social security: LLCs with employees will pay 50% of the social security contributions which vary according to wage.
Other taxes include the real property tax of 0.35% of the tax value of the property, the withholding taxes on dividend, which may be reduced according to an
The following rates (2020) have to be applied against the gross salary, with the ceilings indicated.
|Type of Insurance||Paid by employer||Paid by employee||Total|
Establishing an LLC brings entrepreneurs a huge benefit in reducing the risks and effects of a failure in all three countries.
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.
The big disadvantage of self-employed people is that, in addition to the 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 Corporate 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 LLC gives you a chance to optimize this process.
In the all three countries 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. Forming an LLC 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 need an ‘LLC’. Yeye Agency had enabled many foreign companies to start their operation in these countries.
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.