The patent tax versus a company — which pays off, and when

For small retail and service businesses with limited turnover, the patent tax can look like the easiest way to start — a fixed annual amount and minimal admin. But it is not always better than setting up a company, and the conditions for using it vary considerably between municipalities.

What the patent tax is

The patent tax under the Local Taxes and Fees Act applies only to a defined list of activities — services, small retail, food outlets, accommodation of up to 20 rooms and so on — carried on by individuals or sole traders, subject to all of the following:

• the activity is on the statutory list;
• taxable turnover in the previous year did not exceed the statutory threshold (historically 25 565 EUR under the Act; some Revenue Agency material links the threshold to the VAT one — 51,130 EUR — so always check the version in force for the year in question);
• the person is not VAT registered, except on certain limited grounds.

The amount is fixed, set by the municipal council within the statutory range, and bears no relation to the profit you actually make.

The advantages of the patent tax

• A fixed annual amount — predictable, regardless of actual turnover within the threshold.
• Simplified accounting — only an income ledger, with no full set of financial statements.
• No advance corporate tax instalments and no annual profit recalculation.
• Income from patent-taxed activity is not included in the annual income tax return — unless you have other income.

Drawbacks and risks

• If the turnover threshold is crossed during the year, you move automatically to the general regime — often retrospectively for the excess.
• Not every activity and not every municipality permits the patent tax — the terms must be checked each year in the local ordinance.
• The patent regime allows no deduction of actual costs — where costs are high (rent, stock, staff) the effective burden can end up higher than taxing real profit.
• Those on the patent tax cannot recover input VAT, even if registered on some other ground.
• The regime does not accommodate hiring staff for the same activity without losing its advantages — growth exhausts it quickly.

When a company is the more logical choice

If you expect rapid growth, plan to hire, are investing in equipment or want access to finance, a company gives a far more stable base. The patent tax makes sense only for very small, stable activity with low costs and turnover consistently below the threshold.

Conclusion

The patent tax is a convenient instrument for a narrow set of micro-businesses, but it should not be chosen merely because the admin is simple. Compare the real tax burden under both options — with projected turnover and actual costs — before deciding.

Frequently asked questions