What’s involved in setting up a Czech trade licence?
How to register a Czech trade license, and what's involved?
A Czech trade licence allows you to work as a freelancer (self-employed person) in the Czech Republic. As a sole trader with a trade licence, you’ll have a registered Czech tax identification number and enjoy the same rights as a company registered in the country.
Types of Czech trade licences
- General trade licences
Eighty common business activities can be performed with a trade licence. These activities don’t necessarily require any special education or university degrees. Common activities among our clients include graphic design, IT, foreign language teaching, sales, photography services, event organizing, and general consulting. You may perform all eighty activities with a single trade licence and tax number.
- Professional trade licences
Professional trade licences are regulated by the government. If you want to obtain a professional trade licence, you’ll need to get an official permit. Taxi drivers, for example, need a certificate confirming that they hold the appropriate qualifications.
Requirements
To be eligible for a Czech trade license, you must be at least 18 years old. You’ll also need to submit different supporting documents depending on your status:
- EU citizens
You’ll need to present:
- Your passport or national ID card
A criminal clearance report or Temporary residency permit is not required for EU citizens!
- Non-EU citizens with a long-term residence permit (long-term visa for 90+ days)
You’ll need to present:
- Your passport
- Your long-term residence permit
- Criminal clearance report from your country of origin (affidavit for US citizens)
- Non-EU citizens with permanent residency or a “partner visa” (temporary residence as an EU citizen’s family member)
You’ll need to present:
- Passport
- Your residence permit
Income tax
Czech income tax for trade license holders is very reasonable. As a freelancer, you have different tax options. Income tax is 15% of your net income, and a 30 840 tax deduction applies.
The “60/40” taxation method is used most often. If you adopt this approach, there’s no need to keep any payment receipts or invoices from your expenses.
Instead, a fixed 60% of your total gross income is written off as expenses while the remaining 40% is your income. You can also have multiple tax discounts and bonuses for an unemployed spouse, kids, or bank interest rates for your mortgage.
So, how much tax do you pay?
To see how this works in practice, let’s look at an example. Say your total gross income for last year was 300,000 CZK, then 60% of this figure (180,000 CZK) will be treated as fixed expenses.
The remaining 120,000 CZK will be your net income and taxed at a 15% rate. This brings the tax to 18,000 CZK. After the automatic deduction of 30 840 CZK, however, your final tax bill for the year comes to 0 CZK!
In other words, you pay no tax. This method is convenient and generally the best solution for EU citizens and their family members (partner visa holders).
Taxes are due by March 31 every following year.
Important information
- You can only use the 60/40 method if your annual income is less than 2 million CZK.
- As soon as your gross income exceeds 2 million, you must register for VAT.
- As soon as you invoice EU-registered business, you should be registered for light VAT
- For the situation and calculation that was used above, freelancer visa holders should use the method tax from the full amount for avoiding visa renewal rejections due to insufficient funds. Please check more information about income proof calculation of MOI offices here.
Public health insurance
Once your trade license is active, you must register for public health insurance. In 2023, the minimum prepayment for trade licence holders is 2 722 CZK each month.
Which trade licence holders must register for public health insurance?
- EU citizens
- Expats with permanent residency in the Czech Republic
- Citizens of the US and Albania, Israel, Tunisia, Turkey, Northern Macedonia, Serbia, Syria, Monte Negro, Japan
The public health is paid monthly for the previous month
Social security
After activating your trade licence, you must also register with the social security office.
In 2023, the minimum prepayment for trade licence holders is 2 944 CZK each month.
Social security is paid monthly for the current month
Amount of flat-rate expenses
The amount of flat-rate expenses depends on the type of trade business. In other words, we calculate expenses as a percentage of revenue, depending on the area of business. We subtract:
- 80% of income from agricultural production, forestry and water management and income from craft trades; however, you can claim expenses up to the amount of 1 600 000 CZK
- 60% of income from trade business; however, you can claim up to 1 200 000 CZK
- 40% of other income from independent activities (with the exception of income according to paragraph 1 letter. (d) and paragraph 6), however, you can claim up to CZK 800 000
- 30% of rental income from commercial property; however, expenses up to CZK 600 000 can be claimed at most.
Exceeding the limit amounts listed for each percentage of spending does not mean that you cannot use the lump sum. It only indicates the maximum amounts of expenses that can be deducted by this method. If the percentage of the expenses exceeds the set amount, for example if 60% of the expenditure represents CZK 1 300 000, only the upper set limit applies, ie. the CZK 1 200 000. The income tax base then becomes the difference between the real income and the maximum of the percentual expenses.
The advantage in this is that if your actual expenses do not reach the percentage limit, you will save money on taxes. This is typically the case for creative professions that do not have that many expenses. Otherwise, if your actual expenses are higher, you will be taxed more for no reason. This is why you need to seriously consider the transition to flat-rate taxes in advance.
If you, as a self-employed person, apply a flat rate in your income tax return, you can get a discount for a dependent spouse or a discount for a child.
Flat-rate expenses according to business areas
When it comes to flat-rate expenses based on the business sectors, they are divided as follows:
- 80% agricultural production, forestry and water management, craft trades: farmers, fishermen, butchers bakers, furriers, locksmiths, masons, plumbers, innkeepers, manicurists, and hairdressers. You will find a complete list in Annex No. 1 of the Czech Trade Licensing Act.
- 60% other trades, free trade: geologists, opticians, credit intermediaries, accountants, masseurs, animal breeders, lecturers, financial advisors, accommodation providers - in short, those who have a trade license but are not listed in Annex 1 of the Trade Act .
- 40% freelancers, copyright revenues, businesses according to special regulations: lawyers, doctors, notaries, architects, insurance consultants, artists.
- 30% rentals: renting of an apartment, house, land, or non-residential premises for rent; this includes regular rental of movables, such as cars.
Czech Tax identification number
ICO is your Czech business ID number. Each Czech company and trade license holder has a unique business ID number.
DIC is your Czech tax ID number. This number is issued by the tax office after you register. It usually consists of the prefix CZ + your ICO number for company or CZ + Bith number for trade license holders. If you don't have birtyh number, then The Czech tax office will generate you Tax payer identification number.
Having a DIC doesn’t mean you’re registered as a full or light VAT payer. If you plan to invoice EU companies outside the Czech Republic, then you should register as a light VAT payer. This registration must take place within 15 days of the receipt of your first payment!
Trade license is a “side job” for full-time employees
If you have a full-time job and want to earn some side income outside your employment, you should apply for a trade licence.
Since your social tax and health insurance payments are made by your employer, you won’t need to make any social tax and health insurance payments in the first year. But you should request an annual statement from your employer to see if you need to settle the balance. This will depend on the main income from your employment and tax base from your trade license
If your Czech trade licence as a side business is the same activity as your main job, you should seek permission from your employer. Check your employment contract and discuss the details with your employer before applying for a trade licence.
As a side income trade license holder, you can still enjoy the 60/40 tax method, but if you are using tax bonuses and discounts with your full-time employment, you will pay full income tax from the taxable amount
Want to avoid the hassle of setting up a Czech trade licence on your own in Prague?
Pexpats can handle the entire process for you. Complete registration takes 48 hours!
If you’re an EU citizen who’s interested in getting a trade licence, check out our Prague Trade Licence Set-up package.
Trade licence is for Students and Retired people 2023
Social tax needs to be paid only if net incomeannual income( 40% of gross income) is more than 96 777 CZK. If the net income exceeds 96 777 CZK, then trade license holder should pay full balance amount start paying minimum deposits of social security taxes.
Czech flat tax from 2023
The Czech financial tax offices came with a new solution from 2021. From 1.1.2021 The Czech trade license holders can use the method Czech flat tax amount of 6 208 CZK monthly in 2023
Monthly Czech flat tax amount 6 208 CZK covers the health insurance, social tax and income tax, and no tax paperwork.
Only the condition of using the method Czech flat tax is the annual income amount should be less than 2 000 000. Czech government increased condition maximum amount to 2 000 000 CZK from 1.1.2023
Confused About Czech Tax calculations? You can simply use our online Czech calculator tool below.
Reporting shared income with a cooperating person
It’s also possible to transfer part of your income to a cooperating person to reduce your tax burden. The cooperating person as defined by law must:
- Help the self-employed person with their business activities (e.g. administration, accounting, invoicing, customer orders, communication, etc)
- Reside and work in the same household, or participate in a joint “family business” venture as defined in Section 700 of the Labour Code
- Be a spouse or wife on parental leave, or in some cases a retired parent, or a child over 18 who is enrolled in school
Note: If the spouse is not on parental leave, their main source of employment must come from their cooperation in the business. In cases that the cooperating person is on parental leave or otherwise employed, their cooperation falls under secondary, independent income-earning. In this case, it is less advantageous to claim a cooperating person due to health and social insurance contributions.
How to report a cooperating person
The entrepreneur must inform the tax office, social security, and health insurance about any cooperating persons. The cooperating person must also register for income tax, and have a registered Tax ID number. They can then arrange a variable symbol with both social security and health insurance to make monthly advance payments.
Limits on reporting shared income
The Income Tax Act stipulates that taxpayers must transfer the same percentage of income and expenses to the cooperating person. This means that if you transfer 50% of your income, you must also transfer 50% of your expenses.
On top of this, the Income Tax Act sets maximum transfer limits. These are:
- Income and expenses up to 50% (maximum CZK 540 000) for a cooperating spouse
- Income and expenses up to 30% (maximum CZK 180 000) for a non-spouse
Note: You can have more than one business partner. However, if you have more than one cooperating person, you can transfer a maximum of 30% across multiple cooperating persons.
Advantages of sharing income with a cooperating partner
Let’s look at a practical example of why you might share income with a cooperating person. Say you are a self-employed entrepreneur who wants to use your spouse as a cooperating person.
- You earned CZK 800 000, of which you applied the 60-40 tax reporting method.
- Your expenses are now CZK 480 000, and your profit is CZK 320 000.
- After the basic tax payer’s discount (CZK 30 840), you owe CZK 17 160 for the 15% income tax.
Instead, however, you decide to use your spouse as a cooperating person.
- You transfer 50% of your income and expenses to your spouse (whose main source of employment is your business).
- Both of your tax returns are now the same: CZK 400 000 profit, CZK 240 000 expenses, with an income tax of CZK 24 000 to pay.
- You apply the basic tax payer discount (CZK 30 840), meaning both you and your spouse now have zero tax liability.
- Using this method, both you and your wife now pay zero income tax.
In this way, not only do you reduce your tax burden by claiming your spouse as a cooperating person. Your spouse’s income also does not exceed the taxable base after discounts, meaning you both have zero tax liability.
Gift tax in the Czech Republic
As of 2014, the Income Act abolished Gift Tax as well as inheritance tax. However, now all donations must be declared at the regular income tax. This is 15% for freelancers, or 19% for legal companies.
All assets that service from donations are thus subject to zero gift tax, but are included within income tax reports as gratuitous income. This income is taxed at the same rate as all other income from one subsequent tax year to the next.
Exemptions to income tax from gifts include:
- Those from a spouse or direct relatives (children, parents, grandparents, grandchildren)
- Donations from a collateral line of kin (siblings, nieces, nephews, uncles, aunts; children’s spouses; spouse’s children, spouse’s parents, parent’s spouses)
- Gifts from somebody who lived with the beneficiary, donor, or testator for at least 1 year before the transfer or death of the testator in a joint household. This person was thus either a caretaker of the joint household, or was once a dependent of the beneficiary, donor, or testator for maintenance purposes.
Note: Any donation which does not exceed CZK 15 000 per year (tax period) is exempt from income tax. This stands regardless of the donor.
Taxes on transfer of real estate
The same rules above apply for the transfer of real estate. Real estate is exempt for gift taxes, but it instead falls under income tax. That is, unless you are one of the groups above, in which case the real estate is exempt from taxes.
Donation can be one of the easiest and most inexpensive ways to transfer real estate. If not exempt, freelancers will pay 15%, while legal companies pay 19%. This amount also falls under gratuitous income, and will have subsequent tax rates from one year to the next.