Here’s how to get money from your game on platforms with as few costs as possible (part 1)
Similar dilemmas, questions and considerations arise for game developers who expect revenue from their games in the near future, and are now considering which business form is best.
In this context, the business form that is the best, as a rule, implies the form in which the least amount of income from the game will go to taxes and contributions. In order to have as much income as possible, the question “Which form is best?” is asked. I would also say that the only truly correct answer to that question is, again, “It depends.” Even in our relatively simple tax system, multiple options can be extremely profitable in some circumstances and completely unnecessary in others.
Accordingly, today’s blog aims to present several options, i.e., forms of business and the associated tax burden, so that people involved in game development can make an informed decision. Since this topic is pretty extensive, we will divide it into two parts, and today we will cover two forms that are suitable for complete beginners in business, who do not expect significant income, and in the next blog, we will further expand the analysis to more complicated cases and larger volumes of business and income.
Before exploring individual options, below are the assumptions that will guide us in this blog.
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We will call the person who develops video games Saša.
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We will not consider gray areas, i.e. illegal options.
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Saša is a tax resident of Serbia, where he spends more than 183 days in one year, has an ID and registered residence in Serbia.
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Saša earns income from abroad from his game, e.g. via Steam, App stores, etc., and has no other sources of income.
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Saša, at least for now, does not have team members (in the formal sense) that he pays, he does not pay external collaborators, software licenses, etc., or, if he does, he does not pay them in a significant amount.
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Saša is not employed in Serbia and does not have an entrepreneurial business or “d.o.o.”.
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Saša wants to receive income from his game to an account in Serbia.
Our goal is for all the income to be brought to Sasha with as little outflow as possible in the form of taxes and contributions (which we will collectively call duties, for the sake of brevity and because that word is great), but also other mandatory costs, if any.
We will consider the level of duties as the effective tax rate (ETR) in relation to the net amount. For example, an ETR of 30% means that the duties amount to 30% of the net amount and that if Saša wants to receive EUR 1,000 in the account, he must receive EUR 1,300 in income.
We will consider income levels below the annual personal income tax threshold, primarily to limit the scope of this analysis to something relatively concise. For the same reason, we will not take into account any taxes that may arise abroad, such as US withholding tax.
Taxation as a freelancer is the latest option, introduced in the Serbian tax system in 2023, and it is intended for persons without a registered company, business, etc., who earn occasional or regular income from their work (in the broadest sense) of one or more payers who are not domestic legal entities.
Not to go too far into the analysis of this option, for now it is enough to say that Saša falls into this definition, because he does not have a company and earns income from abroad from his work, specifically from his game. If Saša chooses this option, he will pay tax every three months (quarterly), reporting all the income that has been credited to his account, within 30 days before the end of the quarter.
Within this option, there are two different models, which differ in several key elements that we will not discuss in detail separately, but only through the end effects, which look like this:
Model 1, therefore, has an advantage at lower levels of income, but when incomes start to rise, Model 2 has an obvious advantage. The good thing is that this form allows you to choose a model for each quarter, and Saša can choose Model 1 in one quarter, when the income is lower, and when the income increases, he can choose Model 2.
The presented calculation would be somewhat different if Saša was already employed in Serbia (e.g. he works for a company and develops a game in his spare time), because in that case, in both presented models, slightly fewer duties would be paid, specifically no contributions for health insurance. This would result in lower amounts of income under Model 1 being, in effect, completely tax-free!
Also, it should be pointed out that when we talk about the income of individual persons, the ETR of 20/30% is still significantly better than the ETR that is applied to most earnings, i.e. income from employment, where the ETR is about 60% on average.
The taxation of entrepreneurs is more or less known in practice, and when we talk about it, we talk about two models: the so-called flat-rater and the full entrepreneur. Roughly speaking, the main difference between these two models is as follows.
The flat-rater (“paušalac”) pays monthly fees in a fixed amount that does not depend on the actual income (nor on the actual expenses) but on the activity performed (according to the registered activity code) and the place where it is performed. Activities that the state considers profitable are subject to higher duties and the same applies to larger cities and municipalities.
The full entrepreneur (“knjigaš”) pays annual profit tax, i.e. the profit they achieve, as the difference between income and certain types of expenses, which practically means that the duties depend on both income and expenses.
For the purposes of this comparison, we will have to introduce a few more assumptions, namely the following:
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The flat-rater will pay monthly fees of 320 euros, which should be the average for most activity codes that could be applied here and for most major cities in Serbia.
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The full entrepreneur will be the so-called full entrepreneur with their own earnings, which means paying their own minimum wage, essentially a salary, every month. The duties paid on these earnings will be taken into account for ETR calculation. There is also a type of full entrepreneur without their own earnings, but they are subject to higher duties, so we will not analyze them here.
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As a rule, a full entrepreneur must engage the services of an accountant in order to do business, so this mandatory cost is included in the calculation in the same way as the cost of duties because for these purposes it has the same nature (it is money that must be paid to someone in order to do business).
The effects of these forms of taxation look like this:
From the previous tables we can see the following:
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Both forms are fundamentally inappropriate for the smaller amounts of income from Example 1: for the flat-rater because the amount of fees is fixed and too high, and for the full entrepreneur because it fails to cover the basic costs of the accountant and the minimum wage. Example 2 is not much better, and due to the low-income amounts, the ETRs are still higher than what we could see with freelancers.
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With Example 3, we already see a significant improvement in ETR, and we reach rates that are significantly better than the ETR rates applicable to average earnings (approx. 60%).
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Example 4 ETR continues to fall, and now the flat-rater stands out with the convincingly best ETR of 11%, and even the full entrepreneur provides a slightly better ETR than in the previous example. The reason for this lies in the fixed amount of duties for the flat-rater, which does not change according to the income, and the higher the income, the lower the amount of duties will be in relation to it, and consequently the lower the ETR.
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In Example 5, the situation changes, because now we have reached incomes that exceed the threshold for flat-rate taxation, and the flat rate here falls out of the comparison. However, the ETR applicable to the full entrepreneur is now even lower, since the threshold does not apply to the full entrepreneur, and it would continue to fall to a certain amount in line with revenue growth.
When we look at all the tables presented now, we can conclude the following:
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A freelancer has a clear advantage in terms of lower amounts of monthly income, up to approximately 2,000 euros per month, and these amounts, in fact, do not make any sense for a flat-rater and a full entrepreneur. The freelancer also does not require any prior registration, nor separate bank accounts, etc., but only quarterly reporting of income, which implies the selection of one of the two possible payment models for each quarter.
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From 2,000 euros upwards, the flat-rater has a clear advantage, even though it implies the “opening” of an entrepreneurial shop, i.e. formal registration with the Agency for Business Registers, opening a new bank account, etc. However, the flat-rater does not have other business expenses, such as a full entrepreneur, and it has the best ETR up to the threshold applicable for flat rate taxation (six million RSD).
- After breaking through the threshold for flat taxation, the full entrepreneur takes a clear lead in terms of ETR and essentially maintains that lead as revenues continue to grow and support the increase in revenue volume, i.e. scalability. A full entrepreneur requires more or less the same “opening” procedure as the flat-rater, but it is slightly more complex to maintain.
The table below contains a simplified overview of the best forms by amount of income.
In the next blog, we will consider the advantages offered by a limited liability company (“d.o.o.”), especially when taking into account other development costs, such as licenses for software tools and contractors, but also the costs of other team members – employees.