Tax-Optimization Strategies for Czech s.r.o.

[phlx]

Hello everyone,

I’m relocating to czech republic, and of course that comes with figuring out everything related to taxes.

We do software development - we are 2 shareholders of sro ( currently incorporated in slovakia, both Slovak citizens ).

As we both have moved to CZ, now im trying to figure out what is the best way to legally optimize the taxes.

All customers are from US, yearly making around 150K usd. As you can probably guess its hard to find expenses as we have no sub contractors or employees.

My main questions:
- what is best way to take out money from sro?
- tax optimizations tips and tricks ( eg. Those everyone does )

As we both will be 183+days a year in CZ living a life there, we will effectively be tax residents in Czech Republic.

Any kind of know-how sharing and tips is greatly appreciated!

 

[void]

you don't specify whether your customers care who is their supplier...
if the answer is NO then you would be better off not to incorporate as s.r.o. and instead both become Czech OSVC (self-employed individuals) - in this case you could both use 60% fixed expenses and your overall taxation (including mandatory social and health insurance) would be around 12% (depending on your actual turnover and other factors impacting the tax returns filing)

this also answers your question

My main questions:
- what is best way to take out money from sro?
- tax optimizations tips and tricks ( eg. Those everyone does )

in case you would still incorporate a company.... it just involves a little creativity organizing your future subcontractors

 

[phlx]

Thank you so much for your reply @void !

“as we have no sub contractors or employees.”

The customers will want to see it under one invoice as we usually work with / build for startups - and with sro i had no problems as they are not worried about having to fight a contractor vs employee status.

Is there any restriction to i corporate sro, become osvc and invoice some part of our work from company? Now that i wrote it it already sounds terrible

“in case you would still incorporate a company.... it just involves a little creativity organizing your future subcontractors”

What are implications to these creatively hired subcontractors? What might be a trouble if we get checked by tax office?

 

[daniels27]

Is there any restriction to i corporate sro, become osvc and invoice some part of our work from company? Now that i wrote it it already sounds terrible

Please check the rules regarding fake self-employment. You may need 2 companies in the worst case.

https://www.tradelicense.cz/freelance_business_on_a_trade_license.html

The official ruling is: If you have only one customer in Czech Republic, and you are working there full-time in the same way as a regular employee but you are not on the payroll (the so-called 'Schwarz - system') the social office may concluded that in fact you are not self-employed at that customer and in fact, the company is evading social- and health charges. This may result in your client having to pay a fine and all the social- and health chargers for you as employee from the day you started working there.

IMPORTANT NOTE: There is really nothing agains having only 1 client abroad! In that case you never have the risk of the 'Schwarz - system'

Maybe a US LLC as customer would do the job here if all money is paid out to either of you. This may also make it easier for your US customers and sound reasonable.

 

[ilke]

Thank you so much for your reply @void !

“as we have no sub contractors or employees.”

I think @void suggests creating them

The customers will want to see it under one invoice as we usually work with / build for startups - and with sro i had no problems as they are not worried about having to fight a contractor vs employee status.

Is there any restriction to i corporate sro, become osvc and invoice some part of our work from company? Now that i wrote it it already sounds terrible

Might fall under Švarc-systém. Some say it can be avoided through, e.g., a UK Ltd. that becomes a Czech tax resident in the form of a branch, i.e., odštěpný závod (but still follows the laws of the UK)

@daniels27 is correct in the clarification. Theoretically the US LLC could be a good choice as it is tax transparent - basically an OSVČ as well but looks like a normal corporate entity, can have multiple members, distributes directly to you. Additionally makes it easier to access US payment rails so your customers save on transfers.

Otherwise there can be some creative options with moving the PE elsewhere but this is very dependent on the case to case scenario, e.g., where in the country you reside and the connection of the location to the work.

 

[phlx]

correct in the clarification. Theoretically the US LLC could be a good choice as it is tax transparent - basically an OSVČ as well but looks like a normal corporate entity, can have multiple members, distributes directly to you. Additionally makes it easier to access US payment rails so your customers save on transfers.

how would that be taxed in CZ? Dividends? Or as it is pass-through no one really cares in US it is an entity - so in czech filing it will go under foreign income under each of us?

 

[daniels27]

how would that be taxed in CZ? Dividends? Or as it is pass-through no one really cares in US it is an entity - so in czech filing it will go under foreign income under each of us?

Technically, you would have to register the US LLC as Czech company. But I would forget about this and just regard all US profits as self-employment income in Czechia. Like it is was another company and you sold foreign client.

We recently discussed a German guy here who has exactly this setup in Germany. All US LLC income is self-employment income in Germany.

Not sure about Czechia but I don't think that they will reconsider you US LLC (which basically is only a seller of record without profit left after your self-employment invoices) to be a Czech company only to then question you self-employment status. Anybody had an idea about this?

 

[ilke]

how would that be taxed in CZ? Dividends? Or as it is pass-through no one really cares in US it is an entity - so in czech filing it will go under foreign income under each of us?

Most likely no one would find out if you just taxed it as dividends, but it is not really the right way to do it and you would have insane tax savings as you would pay just 15% on amounts above 100.000 Kč and then a solidarity tax if you surpass approx. 1.5M without any social/health contributions on the capital income.

Anybody had an idea about this?

The Czech Republic has a legal form for limited partnerships (komanditní společnost) or general partnerships (veřejná obchodní společnost) and the LLC will most likely be classified as one of them, because a multi-member US LLC is also a partnership under the IRS (but not taxable when none of the members created ECI) but both members of the LLC hold limited liability, which is a benefit.

A Czech limited partnership will pay tax somewhat similarly to a sole proprietorship, but its disadvantage is that it cannot apply the fixed deductions like a sole proprietor, who can count 60% as expenses irrespective of the real amount spent. There are tax differences between the limited partner (who only has liability for the share capital) and the general partner (who has unlimited liability).

The US LLC would probably be taxed in the same manner and they should define who the GP and LP are. Or have the general partnership where both are the same.

https://portal.pohoda.cz/dane-ucetn...eni-zisku-v-osobnich-spolecnostech-v-o-s-k-s/

Maybe they could own the LLC and both register as OSVČ, then tax the distributions as the OSVČ income and apply usual 60% deductions, paying social and health contributions on the rest as well. This is the most tax effective but difficult to clarify its legal status as the Czech Republic does not have a legal standpoint on transparent entities other than the v.o.s. and k.s.

 

[daniels27]

Yes but sounds pretty complicated. Maybe better forget about it and just run the LLC without profit and invoice all to the self-employment? Then there is clarity what is to pay and there is no classification of US LLC roulette with which you can lose money too (most westerners in Bulgaria win as they don't declare anything).

 

[phlx]

But isn’t invoicing an LLC you own via OSVC a “controlled transaction”? Anyone can give me some hints how is this legally set in czech laws?

 

[daniels27]

But isn’t invoicing an LLC you own via OSVC a “controlled transaction”? Anyone can give me some hints how is this legally set in czech laws?

Then you do PHLX & QIMY LLC to income your clients. Then you invoice your share to QIMY LLC which is owned by your friend and which is then passed onto you. And for you friend's share PHLX LLC owned by phlx.