Survival Kit IV. Tax System in the Czech Republic Taxation of Individuals – Personal Income Tax

Taxation of Individuals – Personal Income Tax

Residency

An individual is considered resident for tax purposes in the Czech Republic if either of the following conditions is met:

The individual possesses a permanent home in the Czech Republic. The possession of a long-term visa does not itself make an individual a tax resident in the Czech Republic.
The individual is present in the Czech Republic for 183 or more days in a calendar year. This includes the days of arrival and departure.

If a foreign national is considered resident for tax purposes in the Czech Republic and at the same time he/she is a tax resident of a country with which the Czech Republic has concluded a double-taxation treaty, the determination of tax residency under the treaty applies (subject to Czech interpretation of the treaty).

Czech tax residents are taxable on their worldwide income, subject to restrictions by the applicable double taxation treaty (if any). Czech tax non-residents are generally taxable only on their Czech-source income.

Taxable Income

Taxable income includes the following:

Income from dependent services (employment).
Income from independent services (entrepreneurial income).
Income from capital (interest, dividends, etc.)
Rental income.
Other income.

Employment income: Income from dependent services includes income and related remuneration from employment. Taxable remuneration from employment includes all monetary and non-monetary remuneration and certain in-kind benefits. The tax base of employment income is “super gross salary” (as part of the 2021 tax reform, the abolition of the “super gross salary” has been proposed, but at the same time the personal tax rate would also be changed), which includes gross salary and the statutory social security and health insurance contributions paid by the employer. In the case of income from foreign resources, the “super gross salary” includes the deemed statutory social and health insurance contributions according to Czech law (i.e. 34 % from the gross income subject to cap).

For the purposes of calculating “super gross salary”, an employee’s gross salary has to be increased by the actual contributions paid by the employer in another EU Member State, the EEA or the Swiss Confederation.

For the employees who are subject to the social security and health insurance system of a third county, the “super gross salary” is determined based on the gross salary increased by the hypothetical Czech contributions (i.e. the 33.8% that would have been paid in the Czech Republic).

Income from independent services: This type of income includes income of entrepreneurs, independent consultants and other self-employed individuals. Expenditures required to “generate, assure and maintain” the taxpayer’s income are deductible when calculating taxable income. Deductible expenses are the same as those permitted under corporate income tax rules. Alternatively, a lump-sum deduction may be applied.

The lump-sum deduction depends on the type of activities and ranges from 30 % to 80 % of taxable income, and all the lump-sum categories are capped. The cap for calculation of lump-sum costs amounts to CZK 2,000,000. Taxpayers can also apply the tax relief for children and wife without own income. Social security and health insurance contributions paid by the entrepreneur are tax non-deductible.

Income from capital: Income from capital, i.e., dividends, and other yields from securities, limited liability companies or limited partnership interest and profit shares from silent partnerships are taxable income. In many circumstances the entity paying the income to the individual withholds Czech tax (generally 15 %), and this constitutes the final tax liability on the income.

Rental income from movable and immovable property: Taxable income is the difference between rental income and related tax-deductible expenses or a flat 30 % lump-sum deduction from rental income. The maximum lump-sum costs deduction is CZK 600,000. Czech-source rental income from movable property earned by individuals who are in the Czech Republic for less than 183 days in a calendar year is taxable at a special rate of 15 %, unless the relevant double-taxation treaty provides otherwise.

Other income: “Other income” includes income from the sale of the individual’s own real estate, moveable property, shares, participation, securities, occasional income, prizes in sporting or advertising competitions, and prizes from lotteries. Exemptions are available for gains that arise from the disposal of assets which have not been used for commercial purposes and that have been held for a certain minimum period. For shares, the minimal required holding period to receive a tax exemption on capital gains is generally five years. For shares, the minimal required holding period to receive a tax exemption on capital gains is generally five years, but in some cases this period is reduced to 3 years.

Income received free of charge such as gifts, heritage, falls also to other income. These kinds of income were subject to special taxes in the past.

Tax Base

The overall tax base is calculated by adding together all (taxable) sources of income. In order to calculate the overall tax base, annual income from employment (net of exemptions and deductions) is added to other income, e.g., profits from entrepreneurial activities, capital income, and rental income. The overall tax base does not include Czech-source income from which tax is withheld at source, e.g., dividends, interest and share of profits. Losses arising from one source of income are offset against income from any other source, with the exception of employment income. In other words, it is not possible to offset losses arising from capital, entrepreneurial or rental sources against employment income. Various deductible items and tax relief might be utilised in a tax return.

Tax Rate

There is a flat personal income tax rate of 15 %. Employment income and income from independent services exceeding CZK 141,764
(4 times the average salary) per month is subject to solidary surcharge amounting to 7 %.

Tax Period

The tax period is the calendar year.

Tax Returns

The filing deadline of the tax return for personal income tax is the same as those for the corporate income tax return.

If an individual has no income other than employment income or a director’s fee drawn from one Czech payer at a time, or from different Czech payers in subsequent intervals, and he is not claiming certain special deductions, he is not required to file an annual tax return. Tax payers whose annual employment income exceeds CZK 1,672,080 (48 times the average monthly salary) are obliged to file a personal income tax return.

Payment of Tax

The tax liability is assessed in the annual tax return and must be paid by the same due dates as those for filing the tax return. If a tax refund is claimed in the tax return, the Financial Office must make the refund within 30 days after the return is filed, unless there is to be a formal audit of the tax return.

Tax on employment income is normally deducted by way of withholding by the employer. For other income, a taxpayer must make advance payments on the estimated tax liability for the tax year. The frequency and percentage of advance payments depend on the taxable income reported in the last filed tax return.

Tax Registration of Foreign Nationals

All foreign nationals assigned to the Czech Republic by a foreign employer with a service permanent establishment in the Czech Republic must register for income tax purposes and file annual income tax returns.

Social Security and Health Insurance Contributions

Social Security and Health Insurance Contributions are obligatory for an individual employed by a Czech company. Furthermore, an employee working in the Czech Republic for a foreign employer is subject to social security and health insurance contributions in the Czech Republic if EU regulations or a bilateral social security treaty apply (unless the assignee is an A1 holder or the holder of a Certificate of Coverage).

If EU regulations do not apply and no bilateral social security treaty exists, the obligation to contribute to Czech social security and health insurance schemes has to be reviewed individually.

Health Insurance: Health Insurance covers both health and medical care and is administered independent of the state budget. An individual can choose a licensed health insurance company to which the health insurance contributions will be paid. If an individual is not covered by the mandatory Czech health insurance scheme, he may contribute voluntarily on a commercial basis.

Social Security: Social Security contributions provide funding for three separate funds: pensions, unemployment and sickness.

Calculation of the contributions: The mandatory contributions of employees are calculated from the individual‘s remuneration, which is similar to the payroll tax base.

Cap: There is a capped annual base for the social security payments of employees and private entrepreneurs. The cap for social security contributions amounts to 48 times the average monthly salary, i.e. CZK 1,672,080. The cap for health insurance contributions was cancelled.

Rates:

Mandatory social security contribution rates

Employee: 6.5 %
Employer: 24,8 % (from 1 July 2019)
Private entrepreneur: 29.2* %

Mandatory health insurance contribution rates

Employee: 4.5 %
Employer: 9 %
Private entrepreneur: 13.5 %

* A private entrepreneur has the option of contributing sickness insurance in the amount of 2,1 % (from 1 July 2019).

Taxation of Corporations – Corporate Income Tax Value-added Tax

Tomáš Urbášek
PricewaterhouseCoopers
Česká republika, s.r.o.
nám. Svobody 20, 602 00 Brno
+ 420 542 520 255
tomas.urbasek@pwc.com
Petr Mašek
PricewaterhouseCoopers
Česká republika, s.r.o.
nám. Svobody 20, 602 00 Brno
+ 420 542 520 254
petr.masek@pwc.com

Tomáš Ráček
PricewaterhouseCoopers
Česká republika, s.r.o.
nám. Svobody 20, 602 00 Brno
+420 542 520 257
tomas.racek@cz.pwc.com
Dana Hlaváčová
PricewaterhouseCoopers
Česká republika, s.r.o.
nám. Svobody 20, 602 00 Brno
+420 542 520 261
lucie.hlavacova@cz.pwc.com