How are private traders taxed?

As a new private trader you mainly pay two types of tax:

1. Income tax (Prepayment tax) of the profit of your business

2. Value added tax or VAT, if you are VAT liable.

Prepayment Taxes

Private traders pay prepayment taxes of their profit. When you set up a new business, you need to estimate the income and expenses of the business, as well as any operating profit. You have to pay taxes in advance based on the income estimate you have provided. 

Keep an eye on your actual income and expenses during the year to see how well the estimate matches your actual figures. If it seems your income will be lower or higher than the estimate, request a change to your prepayment at MyTax. 

We suggest having a finished business plan and profitability calculation to help you with estimating your prepayment taxes!

When you have applied for prepayment tax and made your estimation, the Tax Office will send you a prepayment decision and bank transfer forms via post and to your MyTax. 

If your estimation was high and you paid too much prepayment taxes, you will receive them as tax refunds later. If you estimated low and paid too little, you will receive additional prepayments from the Tax Office. If you pay the tax after the due date, you will have to pay late-payment interest. Read more about the consequences of late payment.

Value Added Taxes

VAT or value added tax is a tax related to consumption. It must be paid when goods and services are purchased.  When business enterprises sell goods and services, they must add VAT to the price. The client or customer pays the tax when buying goods and services. The business must then report and pay the VAT on the sales to the Tax Administration. The company’s tax period for VAT determines how often VAT must be filed. 

When businesses have bought goods or services from other parties liable for VAT (other businesses etc), they can make deductions from the VAT on their sales. This requires that the business bought the goods or services for a purpose related to its VAT-taxable activity. No VAT deductions can be made if the business bought the goods or services for its own use or for its employees’ private use.

Private Traders "salary" and it's effect on the profit?

A private trader does not pay themselves salary. When you withdraw money from the business to yourself it is a personal or private withdrawal which is not added as an expense. 

Private withdrawals do not lower the calculated profit of the business and therefore do not affect the taxation.

For example:

You have invoiced consulting for 10 000€ + vat 25,5% (2550€) = 12 550€ in total

You receive the sum of 12 550€ to your business account, then declare and pay the vat sum (2550€) to the Tax Office. 

The remaining sum of 10 000€ is left as profit. You withdraw this amount to yourself and use it. Your private trader business is taxed for the profit of 10 000€ and you must pay prepayment taxes of it. You get a bill for prepayment taxes and must pay the amount to the Tax Office. Therefore it is always important to keep enough of your profit in your business account so you can pay all necessary expenses such as taxes.