One of the common routes to doing business in the Czech Republic is though a sole proprietorship, often called a “trade license”.
A sole proprietor (osoba samostatně výdělečně činná, or “OSVČ”) is a physical person who has income from carrying out a business and/or self-employment (a “freelancer” or “entrepreneur”). The accounting records of the company must reflect these relationships. To be self-employed, you must be 18 years of age, do business on your own account and have a clean criminal record. The accounting records of the company may be kept using either simple or accrual accounting. There are significant tax advantages to working as a sole proprietor – see the income tax section. An entrepreneur may be a tradesperson registered with the Commercial Court (Obchodní soud), trade license regulator (živnostenský úřad), or someone who is self-employed and regulated under a special law, e.g. notary, tax advisor, journalist, farmer, etc. Or s/he might have income from shares of participation as a partner in a limited partnership (komanditní společnosti). We will focus here primarily on tradespersons registered with the trade license regulator.
Formation of a sole proprietorshipSole proprietorships can be formed in 1-3 days after filing papers with the trade license regulator. You will need to file the application on a Monday or Wednesday, as other days are by appointment only. Preparing forms in advance (downloadable form the Internet) is also advised. Generally, the applications will be processed while you wait, or if the staff at the trade license regulator are busy, within a few days. Comprehensive services in this area are provided by accounting and business services firms, as well as many legal offices, but with patience and determination you can do it on your own. Fees for formation can vary depending on the level of hand-holding provided, 5,000–10,000 CZK being representative. Unlike an s.r.o., there is no need to pay in any capital.
To form a sole proprietorship, the entrepreneur files with the trade license regulator a registration form describing the full name and personal details, residential and legal place of business (místo podnikání), and list of selected trades. The application must also contain photo identification, proof of citizenship or legal residency (usually a long-stay or permanent residence visa), a foreign criminal record extract or affidavit confirming you have no criminal record, depending on your country of origin, a deed (výpis z katastra nemovitosti) and owner permission (souhlas vlastníka) for your place of business, trade license selection form,and a stamp tax of 1,000 CZK per trade license
In 2010 the trade license law was significantly changed, dividing up the trades into free (volné) and regulated trades. Most trades fall under the free category, but others, like accountants, interpreters and medical professionals may require proof of higher education, professional certifications, etc.
The trade license regulator will obtain a criminal record extract on your behalf from the Czech criminal register. Sole proprietors will need to obtain the same from their home countries or any other country where they lived more than 3 years, or potentially an affidavit from their embassy in Prague (U.S., U.K., others)
If the owner of the address where your sole proprietorship will be registered is a company, it will be necessary to provide an original corporate certificate of that company. The permission agreement will be signed by the director or a representative, with a power of attorney from the director.
Taxes and RegulationA sole proprietorship is regulated by a great number of government entities, the most common of which are the trade license and finance and social insurance regulators, and a health insurance company. Employees of a sole proprietors are taxed in the same way as employees of an s.r.o. – we will not consider these regulations or taxes here. (see section on s.r.o.s). Sole proprietors generally must file an income tax return (daňové příznání) each year by 31 March, and health and social insurance returns (Přehled o příjmech a výdajích OSVČ) by 30 April.
Direct taxes are calculated from taxable income, which will be either revenues less deductible expenses, or, under the percentage of revenue option, generally 40% of revenues. You can keep accrual or simple accounting books and still use the percentage of revenue method. Health and social insurance, meal and entertainment expenses, or poorly-documented expenses are not deductible. Both health and social insurance taxes max out at 1,781,280 CZK of taxable income.
Financial RegulatorYou will need to register with the financial regulator within 30 days for self-employed income tax. You may also register for VAT if you want to be able to reclaim VAT on eligible business expenses, or road tax if you will operate a car as part of the business.
Income tax: 15% of the taxable base.
Sole proprietors must pay monthly advances on social insurance and health insurance that are netted against the annual liability due in April. The regulator/health insurance company provides a summary of advances received to the payer each February. In the first year of business, the advance will be set to the minimum amount; in subsequent years, to the amount of tax paid in the prior year. The amount of social insurance advances paid depends on whether self-employment is your main or secondary source of earned income. (See health and social insurance section).
Social Insurance RegulatorMost likely you will need to register for social insurance if you are self employed. You might not have to if you are not subject to the Trade License Act (e.g., a journalist) or if you are covered by a certificate of coverage under a foreign program. For example, American citizens who are self-employed are permitted to continue to pay into the US system, even if they work in the Czech Republic, for up to 5 years.
Most entrepreneurs will be considered to have self-employment as the main source of income. If you are an employee or receive any number of government entitlements, your self-employment may be considered a secondary source of income. This will impact especially the amount of the advance that you need to pay.
Social Insurance: 14.6% of the taxable base2011 minimum monthly advance: 1,807 CZK (main); 723 CZK (secondary)
Health Insurance CompanyIf you are a citizen, permanent resident or also an employee in a company based in the Czech Republic, you are obligated to register for public health insurance. If you are not one of these, you are required under the terms of your visa to obtain health insurance that meets certain minimum conditions.
Health Insurance: 6.75% of the taxable base2011 minimum monthly advance: 1,670 CZK
This is but a brief summary of issues confronting an entrepreneur interested in conducting business through a sole proprietorship. If you are considering this or another route to business in the Czech Republic, you will need to acquaint yourself with many more details and contact a professional in the international accounting and business services sectors.
