The Czech government introduced a consolidated proposal to fight growing budget deficits, consisting of cutting subsidies and otherwise mostly increasing taxes as of 2024. This is a high-level review of those tax measures which we consider most prominent. The proposal has yet to pass in Czech Parliament and remains subject to change.
Corporate Income Tax
Income Tax Rate
The corporate income tax rate would increase from 19% to 21%.
Passenger cars would be tax-eligible (mainly for tax depreciation) only up to EUR 84k1. Input VAT deduction on cars would however not be affected by this limit. This would only start applying to cars purchased as of 2024.
Fully electric cars can be depreciated faster over a two-year period, but are still subject to the above limit.
Notification of Income to Abroad
Currently, any income payable to non-Czech residents and generally subject to Czech withholding tax must be formally notified to the Czech tax authority. This applies even if no withholding applies because of a tax exemption or a tax treaty protecting such income from taxation in the Czech Republic.
The proposal limits the above notification, in cases of no withholding, to royalties and dividends only. As a result, most notably interest income – which is often protected from withholding tax by tax treaties, and widely exempt where paid to non-Czech resident holders of Czech-issued eurobonds – would no longer need to be so notified.
Taxation of Individuals
Income Tax Rate
Individuals are subject to tax at a progressive rate in two bands of 15% and 23%. The threshold for the higher band is proposed to be decreased from 4 times to 3 times the annual average wage. While that indexation is not yet known for 2024, assuming an increase by 10% against 2023, an employee earning EUR 100k in 2024 would face an annual increase in income tax from EUR 16k to 18k.
Social Security Contributions
The proposal introduces a new sickness insurance contribution of 0.6% to be paid by employees from their wage (which translates into an increase from 6.5% to 7.1% on their social security contributions).
Self-employed persons are currently subject to social security contributions of 29.2% calculated from 50% of their income tax base. The proposal increases this from 50% to 55%, thereby effectively increasing the contributions by 10%. No equivalent increase for health insurance contributions has been proposed.
If a Czech resident individual sells shares in a company, capital gains are generally exempt from income tax, if the shares are sold after having been held for more than 5 years. A similar exemption applies in respect of securities, with a time test of 3 years.
The proposal imposes a quantum limitation on these exemptions at EUR 1.7m p.a. This limit would apply on the gross income (sales price) and not on the capital gain. If the income exceeds EUR 1.7m, then EUR 1.7m thereof would be exempt, whereas the excess would be taxable, with costs (tax basis) deductible pro-rata.
The deductible tax basis would be optionally either the actual acquisition cost of the shares or securities, or their fair market valuation as of the end of 2023. For shares and securities acquired before 2024, the aim is to only impose tax on the gains accrued as of 2024.
For example, assume an individual is selling securities for EUR 10m at the end of 2024 which they acquired 10 years ago for EUR 2m, and which are valued at EUR 6m at the end of 2023. Exempt income is EUR 1.7m and taxable income is EUR 8.3m (83%). Deductible costs are EUR 5m (83% of EUR 6m), for a tax base of EUR 3.3m. In the absence of other income, tax would be EUR 760k.
Employees’ in-kind benefits – currently exempt – would be fully taxable, but also deductible for the employers.
Kindergarten fees – currently deductible up to EUR 700 p.a. – would no longer be deductible.
The tax break for a non-earning spouse – deductible at EUR 1k p.a. – would be limited to spouses caring for kids up to 3 years of age.
Gambling winnings – currently exempt up to EUR 42k p.a. – would only be exempt up to EUR 2k p.a.
Foreign exchange (FX) gains on foreign currency accounts – currently exempt – would only be exempt up to EUR 2k p.a. It remains however unclear how such FX gains would be calculated in practice, given the wide range of possible FX events in the hands of individuals who do not keep books.
Real Property Tax
Real property tax would effectively increase to up to double the current amounts.
1 Numbers are rounded.
Radka Vojtova (Tax Consultant, White & Case, Prague) contributed to the development of this publication.
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