Here’s how to get money from your game on platforms with as few costs as possible (part 2)

In the previous text, we considered the tax burden that occurs when game funds are earned by a freelancer, entrepreneur – flat-rater and full entrepreneur, and now we will review in more detail the third business form that is most often used in Serbia, which is a limited liability company, or Ltd.

Before we get into calculations and comparisons, it would be good to highlight the main difference between the three forms from the previous text and Ltd. For now, it is enough for us to make only one assumption: that we will again call the person who develops video games Saša.

The previous text dealt with business forms in which Saša operates independently and for themself, develops the game for themself, collects income from the game independently and bears all the risk and responsibility of that business.

On the other hand, Ltd. represents a legal entity, i.e. a subject that is legally separated from the persons who founded it (e.g. Saša), which has its own property, income and responsibilities. So, in that case, Ltd. is the one who develops the game, directly generates income and bears the risks.

Why does it matter who develops the game? As a rule, only the person who develops the game receives direct income from it and can dispose of it, e.g. license it to the publisher or even sell it entirely.

Why does it matter who generates the income? If Saša generates the income directly, then there is only one taxable transaction, and if an Ltd. generates the income, then there are two taxable transactions because the goal is still for the income to reach Saša.

Why does it matter who bears the risks and is responsible for it? In the case of lawsuits, unpaid debts, obligations and similar problems in business, if Saša operates independently, they will be responsible, while if they operate through an Ltd., as a rule, the Ltd. is responsible for everything, and Saša is responsible only up to the value invested in the Ltd. at the time of its establishment (which, as a rule, means a minimal amount).

The graph below presents these differences in a simplified way.

At first glance, it seems that an Ltd. mostly just complicates the whole structure and introduces an additional level of taxation. In many cases, this will be a precise assessment, and an Ltd. really just complicates things. However, the limitation of liability that an Ltd. provides is a big deal, because it essentially creates a wall between Saša and various potential problems that can arise in business. Without an Ltd., Saša may end up in a situation where they are liable with the entire personal property (e.g., apartment, car) in case of lawsuits, unpaid tax obligations, etc., while when there is an Ltd., the only thing that can be lost is what is inside the Ltd.

In addition, an Ltd. opens numerous other options in business, such as the introduction of investors and other partners into ownership, easier access to various sources of financing, simpler employment and payment of employees and other associates, a greater selection of options for the so-called “exit”, i.e. leaving and selling the business, etc.

In short, more serious business and/or larger-scale business is not realistic (and not wise) to be carried out without an Ltd., even without dealing with tax issues.

However, we are dealing with tax issues today, so for further consideration, we will make the following assumptions:

1. We will call the person who develops video games Saša.
2. Saša is under 40 years old, so in all the options and examples we will discuss, they will not be subject to  annual personal income tax (which occurs with annual incomes that are three times higher than the average in Serbia for a given year).
3. We will not consider gray areas or completely illegal options.
4. Saša is a tax resident of Serbia, where they spends more than 183 days in one year, have an ID card and registered residence.
5. Saša owns 100% of the Ltd. founded and registered in Serbia.
6. The Ltd. earns income from abroad from their game, e.g. via Steam, App stores, etc., and no other sources of income.
7. In the Ltd., there are no so-called fixed assets in the form of computers, tables, chairs, etc., nor expenses related to business premises.
8. Saša is employed in his Ltd., full-time.
9. Saša wants to receive income from their game to an account in Serbia.

Our goal is that all the generated income goes to Saša with as little outflow as possible in the form of taxes and contributions (which we will collectively call duties), but also other mandatory costs, which in the case of an Ltd. will always include the costs of an accountant, required for the administration of an Ltd.

We will look at the level of duties and costs as the effective tax rate (ETR) in relation to the net amount that reaches Saša. For example, an ETR of 30% implies that duties and other costs amount to 30% of the net amount, and that if Saša wants to receive 1,000 EUR to their personal account, the Ltd. must receive 1,300 EUR of income.

Finally, for the sake of brevity, we will not take into account any duties that may arise abroad, such as US withholding tax.

All forms that we will continue to process will refer to an Ltd. but we will achieve the goal in different ways, meaning how the income reaches Saša.

In this example, the regular salary for Saša was determined in the approximate amount of regular income that the Ltd. has, so that the Ltd. does not make a significant profit and that Saša has a regular source of personal income.

In the previous table, we can see the following:

• The ETRs we see here are usually much worse than the ETRs we discussed in the previous text.
• As income (and Saša’s salary) increases, the ETR decreases, since income increases faster than the items that reduce annual profit. For example, the profit is reduced by the duties that Saša pays on his salary, the accountant’s expense and the income tax expense of the Ltd. Duties increase as the salary increases, but not at the same speed (which is especially pronounced at higher salary amounts), while the cost of the accountant and corporate income tax of the Ltd. are essentially fixed.
• Accordingly, with higher amounts of income, the ETR will continue to decline to a certain level, but only at significantly higher amounts of income (around EUR 25,000 per month) will it approach the rates we discussed in the previous text.
• However, it should be noted that already in Example 5 the annual income tax becomes an important factor, although in our example Saša is under 40 years old, so he uses the prescribed exemption. If we continued to increase the income, at some point we would reach a level that still implies an annual tax, leading to additional tax costs, i.e. more ETR.

In this option, Saša’s regular salary is determined in the minimum amount, and the profit that the Ltd. will pay Saša is in the form of a dividend.

From the previous table we can see the following:

• The ETR in this option, although still not at the level of the ETR from the previous text, is better than the ETR from the previous option, even though there is a higher Ltd. profit tax (because there has to be a profit to pay the dividend) and tax on the dividend paid to Saša. Namely, although there are now two significant taxes, their combined ETR is still better than the ETR applicable to salaries (about 60%).
• Another benefit of this option is the fact that the income from dividends is not included in the annual income tax, so it is possible to further increase income without additional tax obligations.

In this option, Saša also receives a minimum regular salary but receives a larger one-time payment once a year in the form of a bonus, through which almost all of the income generated by the Ltd. transfers to Saša.

From the previous table we can see the following:

• Already from Example 2 we can see a significant improvement compared to Option 1, and even a small improvement compared to Option 2. In other examples of this option, the ETR continues to fall as income and annual bonus increase, so in Examples 4 and 5 we find near the average ETRs from the previous text.
• If we continued to increase the income and the annual bonus, the ETR would continue to fall to approximately 10%, at which point it would stop. This so-called degressive tax rate is a consequence of the rules on the so-called highest monthly base for contributions, which provides that on salaries over a certain amount (about EUR 3,500 net), contributions are paid in part up to that amount, but not on the rest. The effect of that rule can also be seen in the table above, in the row showing the charges on Saša’s annual net bonus, which grow significantly slower than the net bonus amount.
• As in Option 1, the potentially important factor here is the annual personal income tax, which in Example 5, and also with higher incomes, can affect the ETR.

When we look at all the tables and figures, we can conclude the following:

• The annual bonus from Option 3 provides the undisputed lowest ETR from the outset, and the dividends from Option 2 rank second in terms of ETR, while Option 1 seems the least enticing at first glance. However, the calculation would look different at higher income levels (and already within Example 5) if we were to consider in detail the annual income tax, which would affect the ETR within Options 1 and 3, but not within Option 2.
• Even so, while Option 3 seems the most attractive, it carries with it other potential complications. The payment is made only once a year, so Saša receives a minimal salary for the rest of the year. That one-time payment will also affect the calculation of salary for the rest of the year, e.g. when Saša takes annual leave, which complicates the calculation and makes planning difficult. Also, the payment of such annual bonuses within an Ltd. that has only one owner and one employee can be somewhat risky in case of tax control.
• On the other hand, both Options 1 and 2 provide Saša with regular income that is relatively easy to plan and budget.
• Option 1 also provides Saša with a high amount of regular and predictable income, which can be useful when qualifying for loans, leases and similar financial products that Saša may need.
• Option 2 allows full control over the frequency and amount of dividends, as each payment can be adjusted according to specific needs. Also, since within this option the Ltd. achieves financial gain, in some situations it can also be beneficial, e.g. if the Ltd. is looking for a bank loan, financing from certain funds, etc.

The table below contains a summary of the applicable ETRs in individual options and examples:

The following table provides a simplified overview of the advantages and disadvantages of individual options:

Since in this text we have mentioned several aspects of salary taxation, as well as the annual income tax, in the next blog we will consider these topics in more detail, as well as different forms of engagement of team members, through employment contracts, work contracts, copyright contracts, etc.