Tax planning

What it means

Tax planning is the lawful arrangement of a business so that tax is as low as possible while the transactions keep a genuine commercial purpose. The law often offers a choice between several routes, such as flat-rate or actual expenses, or straight-line or accelerated depreciation, and planning means choosing the more favourable one.

The basic tools are the choice of legal form, for example a sole trade or an s. r. o., the timing of income and investment, and use of micro taxpayer status, the R&D super-deduction, loss carry-forward and the method of tax depreciation.

The limit is abuse of law. If a transaction has no purpose other than obtaining a tax advantage contrary to the purpose of the law, the tax office disregards it under the general anti-abuse rule and assesses tax as if it had not happened.

How it works in practice

The question clients ask most is whether it pays to move from a sole trade to an s. r. o. We compare the total burden of tax and contributions at the same income, including the taxation of dividends, and take into account bookkeeping costs, liability and how the owner wants to draw money from the company.

Planning happens before the year, not after it. Decisions on investment, accelerated depreciation, provisions or bonuses must be taken during the year; in December little can be changed, and in March, when the return is filed, almost nothing.

For more complex structures, such as a holding, cross-border transactions or selling part of a business, we recommend applying for a binding ruling. In dealings with related companies the price must follow the transfer pricing rules, otherwise the difference is taxed.

What to watch out for

Schemes promising zero tax, such as invoicing services from a related foreign company with no real activity or buying fictitious services, are not tax planning but a risk of back tax, penalties and prosecution. The test is whether the transaction would make sense without the tax advantage.

Optimising one tax can worsen another. A lower tax base may mean a lower contribution base and later a lower pension or sickness benefit, and paying dividends instead of salary can affect the owner’s creditworthiness. We therefore look at the whole picture, not at one line of the return.