Taxation
In connection with the public finance reform, the Czech government has announced an amendment to tax legislation, which includes a flat tax on personal income, a significant reduction in tax on corporate income, and changes to the value-added tax regime.
Independently of the planned reform, the government has prepared a bill that includes a “technical amendment” to the Income Taxes Act and related regulations. These fundamental proposals for changes contain the following tax adjustments, which, if approved by the Parliament, should come into force as of 1 January 2008.
Here is an overview of the most significant changes in respect of the taxation of individuals.
- The personal income tax rate will be flat at 15%. However, the tax base will be calculated not from the gross salary, but based on a “super-gross salary”. The super-gross salary will include health insurance and social security paid by the employee as well as insurance and security contributions paid by the employer.
- The technical amendment cancels the exemption of income from the sale of shares and shareholdings after the minimum holding period of 6 months for shares and 5 years for other shareholdings. The exceptions will be the transfer of a membership interest in a housing cooperative and also the sale of shares and shareholdings acquired before 2008. Should the proposed amendment be approved, the tax planning for individuals will have to be based on other optimisation tools.
- The tax reform will bring a major reduction in some deductible expenses, such as:
- The costs of employee catering will be considered non-tax-deductible. As a result, only the in-kind income for employees will be tax-exempt.
- On the other hand, employees’ in-kind income in the form of holiday, sports or journey vouchers provided by the employer will not be tax-exempt any more.
- After the entry into force of the new Labour Code the tax-deductibility of expenses in respect of certain working and social conditions of employees (e.g. travelling expenses) has been reviewed.
- Furthermore, the limits on non-taxable financial contribution on employee life and pension insurance will rise.
Current Tax System in the Czech Republic
Corporate Income Tax
Czech tax residents, i.e. legal entities having their registered office or place of business in the Czech Republic, are subject to Czech corporate income tax on their worldwide income. Tax non-residents are subject to tax only on their Czech-source income.
Companies are taxed individually in the Czech Republic; consolidated returns are not allowed. The rate of corporate income tax is currently 24%.
Dividends, profit shares, settlement shares and liquidation surplus shares received from abroad are generally excluded from the tax base and taxed at 15%. Certain forms of income are taxed at source by means of a withholding tax. A 15% withholding tax applies, for example, to interest from saving deposits, and a 25% withholding tax applies, for example, to royalties paid abroad.
Personal Income Tax
Unlimited tax liability applies to Czech tax residents, i.e. those individuals having either permanent residence in the Czech Republic or those who remain for 183 days or more in the Czech Republic during a calendar year. Czech tax non-residents are subject to Czech income tax only on income from sources in the Czech Republic.
Progressive rates apply from 12% up to 32% for income exceeding CZK 331,200. The taxpayer is generally allowed to deduct expenses incurred in generating, maintaining or securing income, and tax exemptions stipulated in the Income Tax Act (subject to certain conditions) may also be applied.
Value added tax (VAT)
The Czech VAT Act is now aligned with EU legislation, i.e. in accordance with the principles laid down by the Council Directive on the harmonisation of the laws of Member States relating to turnover taxes (the so-called “Sixth Directive”).
Czech entrepreneurs can voluntarily register for VAT if they carry out economic activity in the Czech Republic. VAT registration is mandatory if turnover reaches CZK 1,000,000 for any consecutive 12 months.
The following transactions are subject to Czech VAT:
- Supply of goods and provision of services for consideration in the CR
- Acquisition of goods and services from parties registered for VAT in another EU member state
- Import of goods and acquisition of services from third countries (outside the EU).
Generally, VAT at the standard rate of 19% is applied. A reduced rate of 5% applies, for example, to most foodstuffs, books, newspapers, pharmaceuticals, supplies of water, construction services in respect of residential buildings and flats.
Supplies where the provider is able to claim a VAT deduction (e.g. the export or supply of goods to parties registered for VAT in another EU member state) are exempt with credit (“zero-rated” supplies), whereas supplies where the provider is not entitled to claim a VAT deduction (e.g. leasing of real estate, financial or insurance services) are exempt without credit.
Excise Tax
Excise taxes are levied on mineral oil, alcohol, beer, wine, tobacco and tobacco goods. The tax is levied on goods made in or imported to the EU. In the case of imports within the EU, the tax is paid in the country where the goods are consumed. The export of goods outside the EU is exempt from excise tax. The rates vary for different types of goods and units of measurement, such as litres of motor fuel, hectolitre of alcohol, and tax per unit.
Road Tax
Road tax is payable on vehicles used for business purposes in the Czech Republic. The tax depends on engine capacity in respect of passenger cars, and weight and number of axles for trucks.
Road tax for passenger vehicles varies from CZK 1,200 (engine capacity below 800cm3) up to CZK 4,200 (engine capacity in excess of 3,000cm3).
Road tax for trucks depends on weight and the number of axles, and ranges from CZK 1,800 (2 axles and less than 1 ton), up to CZK 50,400 (3 axles and more than 36 tons).
Real Estate Tax
Real Estate Tax is payable by registered owners of real estate, i.e. on land and buildings located in the Czech Republic. The rates depend on the size of the building, location, and actual area of the land in square meters.
Real Estate Transfer Tax
The transfer of real estate is subject to real estate transfer tax at a rate of 3%. The tax base is either the purchase price or the value determined by an expert, according to the Czech Valuation Act, if this value is higher than the agreed purchase price.
Inheritance and Gift Tax
Tax rates are progressive and depend on the relationship between the transferor and transferee and the value of the subject of the transfer (ranging from 1% to 40%).
TACOMA
Bredovský dvůr – Olivova 4
110 00 Prague 1
Czech Republic
Contact: Darina Noviková
Tel: (+420) 226 219 000
Fax: (+420) 226 219 111
Email: marketing@tacoma.cz
Web: www.tacoma.cz
