The essential information when starting your side business

More and more employees are wanting to merge their full-time job with their desire to be entrepreneurs. The good news is that it’s possible! It’s called a side business and is entirely legitimate even if it’s not well known! To combine these two activities in the best way possible, you need to understand the legal obligations and steps to take, while notably avoiding a legal dispute with your employer. Here are some general tips concerning tax, laws and accounting to help you along the way. You will need to take all of these elements into account to successfully juggle employment and entrepreneurship.

Do I have to inform my employer?

According to article 1134 of the Civil Code, contracts must be handled fairly, thus implying that you remain loyal to your employer and prohibiting direct competition. So long as your side business doesn’t infringe upon these principles and no other measure is included in your work contract, you are free to start a side business without informing your employer. This being said, take a close look at your work contract because it may contain specific clauses that oblige you to notify or get prior authorisation from your employer. If such a clause exists and has been accepted, you must abide by it.

Whatever the case may be, we highly recommend that you establish open communication with your employer, even in the absence of specific clauses. This approach builds mutual trust and enables you to avoid any misunderstanding. If the activity you are interested in can be perceived as competition for your employer, get their written approval beforehand. This will avoid any potential conflict.

Can my employer refuse my request?

In some cases, yes. Your employer can refuse if your work contract has an exclusivity clause. This type of clause falls under contractual freedom between the employer and the employee and is not subject to the Labour Code. However, jurisprudence states that to be legal, such a clause can only be added to a full-time contract and can’t violate an employee’s freedom to work by preventing them from supplementing their income or work time. If this clause is violated, the employer can take disciplinary measures and even immediately sack his or her employee.

It should be noted that the implementation of guideline (UE) 2019/1152 on clear and predictable working conditions could modify this. This guideline establishes the principle of prohibiting exclusivity clauses unless combining jobs is incompatible for objective reasons such as security and health safety in the workplace, protecting business confidentiality, preventing conflict of interests or the integrity of the public service. To be continued…

What about my salary and work time…?

You can invoice your services to your employer on condition of being set up as a freelance or company and invoicing your jobs in this setting.

Concerning your work time, it is crucial that you follow the terms that appear in your work contract and honour your duty of loyalty towards your employer: your entrepreneurial activity shouldn’t impinge on your schedule or compromise your performance. If you are in doubt or have questions on this topic, the Labour Inspectorate (ITM, link in French) will be able to advise you.

What administrative procedures do I need to handle to start my side business?

Creation and registration procedures are the same as for a traditional company. This includes receiving permission of establishment, VAT and social security registration, and if needed, signing up with the Trade and Companies Register (RCS). We recommend the weekly online workshop “Starting your business in Luxembourg”, provided by House of Entrepreneurship for a complete guide of the different steps.

What fiscal, legal and accounting elements do I need to know about?

You can be exempt if you remain under a certain threshold. For example, if the income from your independent activity is lower than a third of the minimum wage, you can be exempt from some social security contributions. This also means that you won’t be covered by social security for any risks linked to your independent activity. These exemptions can only be valid if you already have social protection thanks to your employee or other status. To find out more, head to the National Health Service’s page (CNS).

When it comes to registering your side business with the CCSS (Joint Social Security Centre) and for VAT, even if your employer already pays for your work time as an employee, you need to register separately. Rules and obligations apply to your independent activity separately from your paid employment.

There is good news about VAT, if your annual income is lower than 35,000 euros, you can opt for a VAT-free regime. In this case, you don’t have to invoice VAT to your customers and don’t deduct VAT from your expenses. This can be very interesting depending on your activity and your geographic scope! To find out more, head to the guichet.lu webpage.

Regarding the taxes on your side business’s income, if you choose to be a freelance, you will need to fill in an income tax return as a private individual. You will have to declare the entirety of your income including your income as an employee on which tax has already been deducted. Your paid employment income won’t be taxed a second time, but it will be taken into account to determine the applicable tax rate for your independent activity according to the tax grid. You can also find more information on the subject on the guichet.lu website.

There is no specific legal status for your side business!

Your side business is considered to be a traditional company, so you will be able to choose the legal status that fits best for you! We recommend that you reach out to a legal counsellor or a public accountant to get personalised information about the best legal status to use.

Is it for all ages?

You can start a side business at any age, whether it be when you are starting your career, as a junior, during your professional career or even just before your retirement. Whatever the case, entrepreneurship is an excellent chance to develop additional skills and explore new professional opportunities. For young employees, remember that minors can’t have a trading permit. Minors can’t be salesmen, but they can take part in volunteer work or other small-scale projects. If you are almost at retirement age, make sure that you check the income thresholds. Specific rules apply to combining pensions and other incomes. You can head to the National Pension Insurance Centre (CNAP, link in French) to find out more information about the thresholds.

Some general recommendations and best practices to take away:

• Be open with your employer about your entrepreneurial project. Even if you aren’t legally obliged to do so, maintain a relationship based on trust and transparency to avoid any misunderstandings and to promote a harmonious collaboration.
• Follow the specific clauses in your work contract, notably non-compete clauses and the obligation to inform your employer. If such a clause exists, it’s important to respect it to avoid any legal issues.
• Keep your books in order by clearly separating income and expenses linked to your side business. This will make handling finances and your income tax declaration much easier when the time comes.
• Look into the different options available for protection and insurance for your business. Depending on the nature of your side business, you may need specific coverage such as professional civil liability insurance.
• Finally, look for resources and specialised counselling, whether it be from legal counsellors, accountants, coaches or support organisations devoted to entrepreneurship. Their knowledge and expertise will help you throughout your entrepreneurial journey.

By following these best practices and taking into account the specific cases brought up, you will be as well prepared as possible to create and develop your side business, all while maintaining a good balance with your paid employment.