It is more difficult to withdraw money from your own business than you might think. In fact, the rules around withdrawing money create problems for business owners, due to tax law regulations. However, we can guide you through some legal solutions to these issues.
Withdrawing funds through dividend payments:
Many experienced tax consultants consider dividend payments the simplest way for business owners to receive compensation. Dividend payments can generally only be paid once a year. Nonetheless, there is always the possibility of utilizing payments in advance, or “advance dividends”. Advance dividends are now permitted, having been illegal in the past. Business owners do however need to meet relevant statutory obligations, such as the preparation of an interim report. If the company’s governing body decides not to distribute the profits within the designated period, the advance payments need to be returned to the company. It is also worth noting that profit shares paid in the form of advance dividends are taxed twice. Firstly, company profits are taxed at a 19% rate. Dividends are then taxed at a 15% rate if the recipient is an individual. However, dividend payments are exempt from health and social insurance contributions.
Based on an initial agreement of a director’s functions, they could receive regular monthly payments, either in the form of specific allocated payments, or as a share of the profits. If the director is both the founder and director of his company, it may be beneficial for the company to conclude his contract. However, the company needs to be careful to control these payments, so as not to damage the company’s own finances. A Czech resident director’s pay is subject to the same taxable deductions as a typical salary: income tax, and health and social insurance contributions. However, a non-resident director only pays a 15% income tax.
Employing a director or founder:
A founder, or a limited liability company’s managing director, can work in a company via an employment contract, and receive a wage as an employee. However, the company will need to ensure that the obligations under the contract do not coincide with the functions of the company’s statutory body. In this form of employment, the director still needs to pay a 15% rate, in addition to compulsory social and medical insurance contributions.
Employment contracts (DPP):
Another way to withdraw funds from your own company would be through a special type of employment, which comprises of a specific contract for the performance of certain work. In Czech, this is called a “DPP”. Someone working under this contract would be employed temporarily, and would be eligible to work no more than 300 hours per year for their employer. Furthermore, a salary of up to 10,000 korunas per month would not be subject to medical and social contributions, so only an income tax of 15% is paid. If this is the person’s only employment agreement, they can use a tax discount.
Borrowing funds from your own company
The most common way to withdraw funds from your own company is for the founder or director to issue a loan for the needs of the company. This loan can be interest-free or interest-bearing. If it is interest-bearing, the interest rate would usually be similar to a bank’s rate, i.e. the market rate. This is due to the taxation implications of a high interest rate: too high a rate would attract the attention of the tax office and may lead to additional taxation requirements. The recipient of the profit, in this case the founder or director, would be required to pay a 15% tax on the interest accrued. After the company begins to profit, the founder’s loan would be returned. We have written more about borrowing money from a member of a trading corporation earlier in our blog. You can read about it here (link).
Renting commercial premises
The founder or director can also rent out premises to the company, and receive regular monthly payments in return. However, the rent should again be fixed at the market rate. You could also rent out moveable property to the company. This profit would be subject only to a 15% income tax.
Other options for withdrawing funds from the company include:
– charging for fuel costs, whereby a lump sum of up to 5,000 CZK/month can be allocated to a company-registered car
– Purchasing office equipment, such as laptops or printers. However, you need to be careful. If the purchase has nothing to do with the business, the tax office may exclude it from company costs, thus incurring additional tax for the business.
Pay attention to the “Schwarzsystem”
Some companies circumvent tax laws via the “Schwarzsystem”, in which the director or owner invoices the company as a sole trader. The director would issue invoices for his services, but these must be services that are not related to the performance of the company’s functions. Otherwise, the tax office would reclassify them as employment and then require additional social and medical insurance contributions.
The boundary between working income and entrepreneurial income is not statutorily regulated at law. However, we can rely on several Supreme Administrative Court judgments, which has often dealt with similar issues. The court has highlighted that companies must differentiate between whether an individual entrepreneur has carried out other, independent work; whether he pays all the costs of implementing this work; and whether he uses his own property or company property for these activities.
For illustrative purposes, a founder, who is also an accountant, could not invoice his own company for bookkeeping: this would be regarded as working income.
Our advice: choose the most appropriate way of withdrawing money from the company, before you begin to register the company and do business.
If you have any remaining questions, the specialists at DoMyTax can guide you on the most suitable option for your company. For over 10 years, our team has been providing accountancy, tax consulting and tax planning services in the Czech Republic.