The Czech Republic, a landlocked country in Central Europe, is bordered by Poland to the north, Germany to the west, Austria to the south and Slovakia to the east. It is divided into 14 regions, with Prague as the capital. The official language of the Czech Republic is Czech and the currency is the Czech crown (CZK).
CIT = Corporate Income Tax - corresponding to IRPEG
SSC = Social Security Contribution - corresponding to the Social Contribution (Employee + Employer)
The Czech Republic separated from Slovakia on 1 January 1993 and is today one of the most stable and prosperous countries in Central and Eastern Europe. The Czech Republic is a member of the Organization for Economic Cooperation and Development (OECD) (since 1995), the North Atlantic Treaty Organization (NATO) (since 1999) and the European Union (EU) (since 2004) .
Maintaining an open investment climate has been a key element in the Czech Republic's transition to a functioning market economy. As a member of the European Union, with an advantageous location in central Europe, a relatively low-cost facility and a well-skilled workforce, the Czech Republic is an attractive destination for foreign investment.
The Czech economy had grown for 6 consecutive years before 2020. However, in 2020 due to the impact of the global pandemic from Covid, GDP decreased by 5.6%.
Taxation of individuals
Taxation of individuals affects residents for income generated wherever they are produced, while for non-residents taxation is limited to income from Czech sources and the rule applies to both citizens and foreigners. To be considered a resident, you must have permanent residence in the Czech Republic (e.g. for owning a home) or be present in the country for at least 183 days a year, including the day of arrival and departure.
For employees, taxable income also includes social security and welfare contributions to be paid by the employer. This increase is always applied even if the employer does not adhere to national pension schemes.
Income from the sale of properties owned for at least 5 years (or in which one has resided for at least two years), social transfers and pensions up to 331,200 crowns are exempt from taxation.
Capital gains, interest and dividends are included in the total income and treated at the ordinary rates. Real estate rental income is considered net of the related expenses actually incurred or of a value equal to 30% of this income and in any case not exceeding 600 thousand crowns.
The following tax deductions and deductions are available for residents and for non-residents only if they have at least 90% of their worldwide income from Czech sources.
Until 2020, the tax rate was set at 15% while a solidarity contribution of 7% was envisaged for the part of income from dependent and self-employed work that exceeds 1,569,552 crowns.
As of 2021, the Czech Republic has returned to progressive taxation, with the introduction of a marginal rate of 23%, as follows:
Gross income up to the maximum social security ceiling (threshold for 2021 of 1,701,168 crowns and for 2022 of 1,867,728 crowns) will be subject to a rate of 15%.
Gross income in excess of this threshold will be subject to a tax rate of 23%.
Since the progressive tax rate is applicable to all types of income, some passive income, such as capital gains or rental income (along with employment income), may be subject to a higher tax burden. However, for most people with only salaried income, this change leads to an effective reduction in labor taxation.
The solidarity surcharge of 7% for high-income workers was abolished as of 2021.
The employer is obliged to make the withholding tax on the wages paid and any surpluses are calculated in the following tax year.
Social contributions are mandatory for a person employed in a Czech company.
Social security contributions finance three separate funds: pensions, unemployment and sickness benefits (along with other benefits). Entrepreneurs can choose whether to contribute to the health insurance fund.
Health insurance covers medical treatment. An individual can choose the authorized company to which to pay health insurance contributions.
Mandatory contributions are calculated from gross earnings, including most benefits and allowances. Income subject to income tax is generally subject to contributions into the social security and health care system.
The contribution rates for the employer are 24.8% for social security and 9% for health insurance. The contribution rates for the employee are 6.5% for social security and 4.5% for health insurance. Payments are made by the employer (both for the part of the employee's and the employer's contributions).
The maximum annual tax base for the calculation of contributions to the social security system is 48 times the average monthly salary (i.e. 1,701,168 crowns for 2021 and 1,867,728 crowns for 2022). This limit applies to both employees and entrepreneurs.
As of 2013, there is only a cap for social security contributions, in fact the limit for the payment of insurance premiums for public health insurance has been canceled.
Taxation of legal persons
The tax affects the income produced everywhere for resident companies and only those of Czech source for non-resident ones. A resident is considered to be if the company is established under the laws of the Czech Republic or if it is effectively managed and controlled there.
The rate in force is 19% while a rate of 5% is applied for income from investment funds and pension funds are exempt. The tax affects income determined according to tax rules, ie taking into account non-deductible costs and non-taxable income. Expenses are considered deductible when inherent to the production of income: for example, write-downs, rental fees (excluding leasing), business travel expenses. Expenses relating to research and development projects can be deducted from income up to double their value if duly indicated in the financial statements. An additional 10% deduction is foreseen for the excess of these costs compared to those of the previous year. Concessions are provided in the event of employee training costs. In particular, fixed assets used for training can be deducted twice in the same year of acquisition and through annual depreciation. The companies can also deduct a fixed amount for each hour of training activity carried out. Fixed assets are classified by law into six categories, each of which corresponds to a period of useful life of the asset and therefore the depreciation rate. The taxable person can choose the ordinary or the accelerated method but cannot change it over the useful life of the asset. If the fixed asset is sold to third parties, the buyer must respect the depreciation method of the original holder.
On the other hand, certain types of expenses are non-deductible, for example interest on loans between related parties if they exceed the limits set by the rules on thin capitalization, i.e. six times the share capital if the lender is a bank (or insurance) and four times the share capital in the other case.
Operating losses can be carried forward within the fifth subsequent year. Particular restrictions are adopted for the use of losses in the event of a significant change in the shareholding structure or merger.
Dividends and capital gains on equity investments are taxed at 15% unless they meet the participation exemption requirements.
In general, the withholding tax for the payment of dividends, interest and royalties is 15%. Payments to taxpayers resident in the European Union (or the European Economic Area) are exempt. According to the Parent-daughter Directive, the exemption applies to dividends if a resident company owns at least 10% of another resident company for at least 12 months. Dividends paid to companies resident in countries with which the Czech Republic has agreements against double taxation, which comply with the conditions for the exemption of the mother-daughter directive and are subject to income tax at a rate of at least 12% are also exempt. . The rate is instead increased to 35% if dividends are paid to residents of countries with privileged taxation.
Capital gains are considered ordinary income and therefore subject to the rate of 19% ._ cc781905-5cde-3194-bb3b-136bad5cf58d_
The tax return must be filed within three months of the end of the tax period, if the taxpayer makes use of an authorized tax consultant, the term is postponed for a further three months. 3194-bb3b-136bad5cf58d_
Value added tax
Value added tax was introduced in the United Kingdom in 1973 following the country's entry into the European Community. For the sale of goods and the provision of services, the ordinary VAT rate, also confirmed for 2022, is applied from January 1, 2011, is 20%, but reduced or subsidized rates equal to:
0% - e.g. on advertising services for charities, supply of goods at charity events, services for the construction of infrastructures for the disabled, supply of equipment for the blind or visually impaired, products for children, editorial products (books and newspapers);
5% - eg. on the purchase of mobility aids for the elderly, purchase of energy-saving equipment to be installed in residential buildings, medical products for quitting smoking (nicotine patches), energy services (electricity, gas or fuel) for domestic or residential use .
Other types of operations are "exempt" for the purposes of applying the tax, such as operations relating to financial services, the leasing of land and buildings, education and education services, medical services, burial services, postal services provided by Royal Mail.
From a procedural point of view, the system is based on the institution of VAT reimbursement relating to purchases which is opposed to the tax due on active transactions carried out, while for taxable persons the obligation to register for VAT purposes occurs when the volume of business, achieved in the previous 12 months and relating to taxable transactions carried out within the United Kingdom, exceeds the limit of 73 thousand pounds. If the taxpayer considers that exceeding the aforementioned limit is a completely exceptional and temporary circumstance, the same may request an exemption from the obligation to register for VAT purposes by submitting a specific application to the HMRC where it will be indicated and motivated in details the exceptional and temporary nature of the transactions carried out.
Declarations, instrumental obligations and payment of taxes
Tax collection can take place in different ways, depending on the type of income received or depending on whether the declarant is an employee, a self-employed person or belongs to none of these first two categories. The different ways of collecting taxes can be as follows:
PAYE (Pay As You Earn) - in this case the employee receives their remuneration periodically, net of withholding taxes withdrawn by the employer, while the final balance, credit or debit, will be determined annually on the occasion of the presentation of the tax return. The same criterion is applied for retirement income;
Self-assessment - this method, mainly envisaged for self-employed workers or in the case of complex tax transactions, involves the compilation and submission to the HMRC (also in electronic format) of one's tax return;
OUR PRESENCE IN THE CZECH REPUBLIC
Our Prague office can count on the support of a firm of Accountants and Auditors founded in 2001 made up of 8 Partners as well as a staff of 20 people who work daily in the areas of auditing, payroll processing, accounting, tax assistance and compliance.