Self-employment income evaluated by banks
Updated: Mar 20, 2020
If we could pick the most confusing part of banks' acceptance of clients' income, it would undoubtedly be income from self-employment seen by banks in the Czech Republic. We refer to it by many names: živno income, osvč income or, the most accurate term, self-employment income. Today we will explain why there is so much confusion surrounding self-employment income and why different banks treat self-employed clients differently. We'll also show you some examples. Since this topic is so wide, we have to split it into multiple blog posts.
A few key takeaways from the article:
The difference of how much different banks can lend you is more than 100%.
Sometimes it is not about the interest rate, but about which bank can lend you the money you need.
What you do for a living matters more than the numbers.
The most common form of self-employment income is income from §7 – regular self-employment, as seen in attachment nr.1 of your tax return. Let's break it down even more:
Applying expenses using given % by their field of business:
80% expenses is limited to those professions with special conditions – masons, plumbers, painters, etc.
60% expenses is used in the vast majority of professions – buy/sell, translation, admin workers, real estate, etc.
40% expenses is used for professions that are expected not to have many expenses doing their job – lawyers, financial and tax advisors, etc.
Applying real expenses: This means you need to track every single bill you used instead of % expenses above. This is often used by restaurant/shop owners, builders etc. If one has enough provable expenses, this can be even more effective than the % expenses used. Lowering your tax base to minimum using this method will, however, have a negative effect on your borrowing capacity, as you will see below.
Using accountancy systems: Basically a more advanced level of application of real expenses, used by a minimum of people due to its complexity.
Some real-life EXAMPLES:
Below we will be working with three clients, all of them earning theoretically the same in gross per §7. The person is single without any children and no special tax deductions. All of them earn 800,000 CZK per year gross (amount in line 101):
Client A is using 60% expenses doing admin work.
Client B is also using 60% expenses but is working as a programmer.
Client C owns a bar and is using real expenses and managed to collect expenses in the total amount of 600,000 CZK (75% of gross income).
Clients A and B will have the same amount to be taxed, while client C has a bit less. Now even though all the clients get about 66,000 CZK per month gross into their bank account, banks see their income very differently.
Now, let's go down into the rabbit hole of “bank logic”:
Client A, an admin worker:
According to his tax return his monthly income is 23,736 CZK.
Some banks even deduct payments for social and health, e.g., roughly 5,000 monthly.
Client goes from a gross of 66,600 monthly in his bank account to a less-than-average 18,700 CZK net monthly income.
Client B, a programmer:
Due to the specific field of work the bank expects very few expenses and will recalculate them using internal coefficients.
Some banks can almost double the accepted income and can get to a monthly income of 54,403 CZK.
Even if the bank deducts 5,000 CZK for social and health, the final income of 49,000 CZK net monthly is way above that of client A.
Client C, bar owner:
After deduction of social and health his final income is around 16,250 CZK net monthly, leading into a deal-killer.
Does this mean unless I am a programmer, my income is heavily discounted?
Not really, because this logic above is not followed by all banks. There are banks that would treat Client A the same as Client B despite his field of work. Some banks have a very wide selection of acceptable professions for Client B and some banks can go from turnover rather than the tax return numbers, mostly used for Client C.
I want some numbers. How much can I borrow?
We're simplifying things tremendously here, but we'll give you a rough estimate. If you are like Client B, you can borrow from 3–5M CZK depending on the bank. If you are like Client A, you can borrow 2–4.5M CZK, again depending on the bank, and for client C, you can borrow 1–3M CZK.
How do I know which bank is the best for me?
Now this is the real question. It all depends on your residency, type of income, and length of stay in the Czech Republic. Generally we can say that the bigger the bank, the less friendly the calculation. It is logical: smaller banks might not be competitive on the rate, but they can offer higher coverage. Unless you want to talk to all the banks yourself, which can be a lengthy and frustrating process, we definitely suggest using a mortgage broker who can summarize all the options for you.
Do you have any concrete advice for me?
Yes, consult your banker or mortgage broker about your tax return and your profession. When it comes to being self-employed there are simply so many factors to consider that the result has to be closely examined and determined individually. What all do we take into consideration?
What type or % of expenses you use
Any other tax deductions
Whether the §7 is your sole income
How long your business has been open
Your field of business
Your citizenship and residency
How long you've been in the Czech Republic
Which city you do your work in
If your income is in CZK
Which bank you bank with
Each one of these parameters can affect the list of eligible banks, so that’s why we say it's highly individual.
In Part 2 of our self-employment blog series, we will look into rental income and make a comparison of individual banks.
Živno income is one of the most complicated ones to deal with, but you are in the right place. We specialize in working with expats, and we are used to resolving complicated cases. We know from experience which bank is the perfect fit for you, saving you headaches, money and time spent shopping around for the cheapest mortgage. Let's chat over coffee. Contact us at 777 877 849 or email us at firstname.lastname@example.org.