Contractor’s guide to contracting in the Czech Republic
Returning to Central and Eastern Europe, following our sojourn to the Iberian Peninsula, we turn to the Czech Republic, famous for one of the most beautiful capital cities in Europe and, more recently, a booming economy. writes Nikolas Papageorgiou, country manager for Europe at Access Financial.
The Czech Republic’s GDP is projected to rise by 3.5% in 2018, placing it among the fastest growing economies in Europe. Following the outstanding performance of 2017, associated with the recovery of investment, growth in 2018 is expected to settle at a level in line with potential but will remain hampered by the shortage of a local workforce due to low unemployment (2.7% in October 2017). This combination of high growth and low unemployment is fuelling demand for foreign workers.
The quality of life in the country can be of a high standard. The society is quite tolerant, secular and the security level is ranked the 6th highest in the world.
Benefits of being self-employed in the Czech Republic
- Central geographic location at the heart of Europe
- One of the lowest tax rates in Europe
- Relatively cheaper accommodation costs versus most other European capitals
- A thriving and diverse social scene, particularly in the capital Prague
- The Czech Republic is a relatively safe country. The crime rate is lower than many Scandinavian countries.
What about take-home pay as a contractor in the Czech Republic?
The Czechs expect you to pay taxes from the first day of your work in the country. The net retention depends on the solution that you opt for, the income level and the tax credits/ reliefs. When your income from employment or self-employment is below a certain threshold, then the applicable tax rate is 15%, one of the lowest in Europe. The net retention for a self-employed individual is approximately 65%.
As a self-employed professional, you may also benefit from the following costs as tax-deductible expenses:
Housing costs for your self-employment activity (mortgage interest, rent, heating, etc.) are deductible, if they are necessary for the exercise of your professional activity. For premises of mixed character, a percentage is determined between the professional and private use. This percentage applies to all housing costs.
- Legal costs
- Banking costs
- Seminars in your field of expertise
- Purchase of books related to your profession
- Interest cost of financing a car for professional activity
- Office equipment and materials
- Social security contributions
- Contributions to a private pension
- Marketing expenses
- Professional Insurances
What taxation levels does the country operate?
Income tax in the Czech Republic is a flat rate of 15% on income up to CZK 1,438,992 (£50,323) per annum (amount applicable for 2018). Above this amount, a tax rate of 22% applies.
Can I pay taxes back home if I reside in the Czech Republic for less than 183 days?
If you work in the Czech Republic for up to 183 days, then you are Czech non-resident for tax purposes and subject to tax only on income from Czech sources.
But Note; if you have a permanent home (residential address) in the country, then you are a Czech resident even if you stay for less than 183 days in the Czech Republic.
What are the social security requirements?
A self-employed person must make social security contributions which cover health, occupational disability, old-age pension and unemployment insurance. The contribution base for self-employed social security contributions is based on the contractor’s taxable income.
The annual contributions for the self-employed individuals are as follows:
- Health Insurance is calculated at 6.75% of the taxable income
- Pension Insurance is calculated at 14% of the taxable income, subject to an annual ceiling i.e. CZK 1,438,992.
- Unemployment Insurance is calculated at 0.60% of the taxable income, subject to an annual ceiling i.e. CZK 1,438,992.
- Social insurance is paid monthly and annually the final insurance liability is calculated and the remaining part is paid.
The only essential insurance for a self-employed person is the social security insurance, which includes the health insurance and pension.
How do I register locally as a self-employed person in the Czech Republic?
EU/EFTA nationals who wish to stay in the Czech Republic for more than 30 days, must report at the Aliens Police within 30 days of their entry into the country.
If they wish to stay longer than 90 days, they must apply for a residence permit at a regional office of the Ministry of the Interior (Department for Asylum and Migration Policy). The following documents are needed:
- valid passport or another valid travel document;
- proof of health insurance;
- document proving the purpose of stay (work contract).
Note: The EU/EFTA national intending to work in the Czech Republic must apply for and obtain a Trade License.
An application for a licence may be made in-person at any local Trades Licensing Office – Central Registration Point (CRP), by post or by e-mail (with a verified electronic signature) or at an office of the public service (Czech POINT).
What tax credits can I get?
Resident and non-resident individuals may set off against their income tax liability a basic personal tax credit of CZK 24,840 (£870).
The following credits are also granted to resident individuals and to non-resident individuals earning at least 90% of their income from sources in the Czech Republic:
- CZK 24,840 (£870) for a spouse living in the taxpayer’s household, if the spouse’s annual income does not exceed CZK 68,000 (£2,381 - double if the spouse is severely disabled);
- CZK 2,520 (£88) if the taxpayer is entitled to a partial disability pension;
- CZK 5,040 (£176) if the taxpayer is entitled to a full disability pension;
- CZK 16,140 (£565) if the taxpayer is severely disabled;
- CZK 4,020 (£141) if the taxpayer is studying and not older than 26 years (28 years in case of doctoral studies).
- CZK 15,208 (£532) for the first child, CZK 19,044 (£666) for the second child and CZK 24,204 (£847) for the third and every subsequent child.
- CZK 12,200 (£427) for expenses for placing a child in the pre-school institution.
Can I just use my own limited company in the Czech Republic?
It is possible to use your own personal service company (PSC) in the Czech Republic. However, the strict practice of creating a permanent establishment by a foreign PSC, and the Czech Republic Tax Authority’s resistance to this method of working by foreign workers, means that for most foreigners this is a bureaucratic and not very financially rewarding route to take.
What about employment?
In this case, the contractor will be locally employed and will pay his social security and salary taxes in the country. Employment laws must be obeyed, and the contractor will be liable for both employer’s and employee’s social security contributions, which amount to 34% and 11% respectively. On top of these costs, a flat tax rate of 15% plus a solidarity tax of 7% are imposed. As a result, the net retention drops to around 46%, making this a relatively unattractive solution.
The Czech Republic is a destination of growing appeal to foreign contractors. Accelerating economic growth and low unemployment are feeding through to pay inflation and an increasing need for foreign talent to plug skills gaps. Taxes are comparatively low compared to most other European countries (though not as low as Poland), and its central European location, together with the appeal of the historic and cultural city of Prague, make it an attractive choice for a growing number of contractors.