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The laws surrounding transfer pricing are becoming ever more complex, as tax affairs of multinational companies are facing scrutiny from media, regulators and the public
Tax policies are constantly evolving and there are a number of complex changes on the horizon that could significantly affect your business.
This article provides an overview of the Czech tax system and planning opportunities. Expatriates taking up employment in the Czech Republic will be subject to comprehensive rules and in some cases employment visa requirements. Grant Thornton Czech Republic’s Expatriate tax team can help expatriates and their employers in dealing with the Czech tax and employment visa requirements, as well as Czech labour and social security issues.
In particular, Grant Thornton Czech Republic can assist expatriates and their employers in identifying Czech tax planning opportunities, reviewing tax equalization policies and provide compliance services regarding the Czech tax filing requirements.
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Expatriates from non-EU countries are required to apply for a Work and Residence Permit (duality). There is a new type of permit for long-term residence in the Czech Republic for the purpose of employment – the Employee Card. This card replaces the visa for a stay of over 90 days for the purpose of employment, a long-term residence permit for the purpose of employment and a Green Card, which will no longer be issued.
No obligations are set for expatriates from EU member states. Various duties (especially reporting duties) arise for the Czech employer.
A Czech employer may employ non-EU nationals. However, the employer must offer their vacancy to Czech or EU citizens first, via an official application to the Czech Labor Office. Once this application has been submitted, there is a 30-day period during which Czech/EU citizens can apply for the position offered (this is called the 'labour market test'). If no suitable Czech/EU citizen is found for the position within those 30 days, non-EU nationals may begin the process of application for the necessary permits, including a Work Permit for the position, as well as a Residence Permit.
Grant Thornton Czech Republic can help with arranging the Work and Residence Permits as well as arranging the Employee Card.
The liability to file the tax return depends on the individual circumstances of the expatriate. Generally, if a tax non-resident has only one income from a Czech employer, the liability to file the tax return does not arise. Invididuals receiving more types of income or Czech tax residents with income from a source abroad are required to file a tax return.
There are two tax return filing deadlines; April 1 of the next year for most individuals and July 1 for individuals represented by a tax advisor. Taxes are due, in full, by April 1/July 1.
A penalty may be charged for the late submission of a tax return (0.05% from the tax assessed for each day of delay up to the amount of CZK 300.000).
The tax year runs from January 1 to December 31.
As of January 1, 2021 a new progresive tax model was implemented into Czech legislation. The income tax rate for individuals is 15% in respect of an annual income not exceeding the 48 multiple of the monthly average salary (i.e. 1,935,552 CZK for 2023). In terms of the monthly employment figures, the threshold corresponds to 161,296 CZK. The 23% rate applies to the excessive part of income exceeding this threshold. This second progressive rate applies not only to the employment income but also to other sources of income (e.g. dividends, sale of securities etc.)
|Sample income tax calculation 2021||CZK|
|Annual gross income||2,000,000|
|Company car for private use*||120,000|
|Fuel paid by employer||50,000|
|Accommodation over limit**||258,000|
|Private (or pension) insurance paid by employer ***||20,000|
|Total taxable income||2,448,000|
|Tax base rounded||2,448,000|
|Tax base for 15% tax rate||1,935,552|
|Tax base for 23% tax rate||512,448|
|The basic tax relief in 2021||30,840|
* Calculated as 1% of the purchase price of the car incl. VAT for each month of the car being available for private use of the employee. As of July 1, 2022 the non-monetary income in case of low emission cars (electric cars, plug-in hybrid) is calculated as 0,5% of the purchase price of the car incl. VAT.
** There is a tax exemption to a maximum amount of CZK 3,500 in one month for tax non-residents.
***An annual total sum of up to CZK 50,000 is tax exempt.
Another major legislative change implemented as of January 1, 2021 is different calculation of the employment income tax base . Until December 31, 2020, the tax base equaled to gross income increased by the total sum of employer social security and health insurance contributions (so called super-gross income). This approach no longer applies and the tax base equals gross income. This legislative change is beneficial for employees as the effective income tax rate has decreased from 20% to 15%.
In the Czech Republic, taxation of individuals depends upon residence.
Czech tax residents are liable for personal income tax on all sources of income, regardless of where the income is received from.
Non-residents pay tax only on CR sourced income, but they have limited possibility of using tax allowances and tax credits.
The following types of income are liable to personal income tax:
- Income from dependent activity (employment)
- income from entrepreneurial activity
- income from capital
- rental income and other income (such as immovable property sale).
The Czech tax residence of individuals is determined according to their permanent home or the length of their stay in CR (183 days or more in CR in the relevant calendar year, either continuously or periodically). However, a treaty ‘tie-breaker’ rule overrides this provision if the individual had closer connections to another country.
All employment-related incomes (wages, salaries, overtime pay, bonuses, gratuities, perquisites, benefits, benefits from employees` stock options, etc.) are taxed in the Czech Republic.
The Economic employer – an economic employer (or deemed employer) is a Czech employer that has a foreign individual working for it who does not have a Czech employment contract. Such individuals are typically employed by a foreign company. In such cases, the deemed employer is obliged to act as payroll agent and must transfer the appropriate income tax advances to the tax office.
Remuneration for any work performed in the Czech Republic, regardless of who pays it and where or when it is paid, is taxable. In this regard the regulation of the double taxation agreements between Czech Republic and other countries apply accordingly.
Generally, all remuneration paid to an employee is subject to tax. Certain non-monetary income is exempt from tax in the hands of employees, potentially under certain conditions set by the Income Tax Act. Examples of such non-monetary income include meal vouchers, canteen services, professional development and education, contributions to (additional) pension and life insurance, gifts under 2,000 CZK/year, temporary accommodation up to 3,500 CZK/month and certain other benefits.
There are no specific concessions available to expatriates in this country.
Double taxation will be avoided in accordance with the applicable double taxation treaties.
Costs may be applied, especially with income from entrepreneurial activity, rental income and other income.
There are some tax deductible amounts available (if special conditions are fulfilled): humanitarian gifts, interest paid on a credit from a building saving or a mortgage, additional pension insurance or private life insurance paid by individuals, etc. Czech non-residents can apply these tax deductible amounts only if their income from sources in the Czech Republic represents at least 90% of their world-wide income in a tax year.
The basic tax credit in the amount of 30,840 CZK for 2023 per tax payer can be claimed by all persons. Other tax credits are available only for taxpayers who are considered Czech residents, and for Czech tax non-residents whose total income from sources in the CR represented at least 90% of their world-wide income in the tax year.
Capital gains arising from the sale of stocks, bonds or real estate are generally taxed as income for companies and individuals in the Czech Republic. The difference between a higher selling price and a lower purchase price is taxed at the 15%/23% tax rate for individuals and 19% tax rate for corporations.
Gains arising to a foreign shareholder on the sale of shares held in a Czech company are regarded as Czech sourced income. However, in many cases a Double Taxation Treaty overrides Czech tax legislation.
A sale of one‘s primary private dwelling is tax exempt if held by an individual for at least two years or at least ten years in respect of property purchased as of 2021 if that property is not used as a primary residence.
The initial inheritance and gift tax was canceled and such income is nowadays subject to income tax if not exempted from taxation.
The tax exemption can be applied in case of a non-monetary gift received from a relative in the direct line and in some cases also in the collateral line or if acquired occasionally up to 15,000 CZK per year.
As of September 26, 2020, there is no real estate transfer tax. There is a retroactive effect for cases, where legal effects of the entry to the real estate register was made in December 2019 and later. Prior to this legislative change, there was a 4% tax which was paid by the acquirer.
Dividends and interest income are taxable upon receipt, just like ordinary income. Dividends from taxable Czech corporations are taxed at a rate of 15% through a withholding mechanism, unless a lower rate is stated in a double tax treaty. Income from a trust, royalties and similar income are taxed as received or allocated, depending on the circumstances.
The witholding tax rate of 35% is applicable to residents of countries that have not signed any double-tax treaty or a treaty on an exchange of information with the Czech Republic.
If an individual holds the securities longer than 3 years and other conditions are fulfilled, the gain from the sale of securities is tax free. The capital gains are also tax-exempt if the total gross proceeds do not exceed the annual threshold of CZK 100,000.
There are no other local taxes on income or property, with the exception of real estate tax (see below).
There are local taxes charged to individuals who own real estate located in the Czech Republic. The tax is assessed on the area of real estate and the rates differ significantly depending on the type of real estate and its physical location within municipalities.
Expatriates of EU member states should have the A1 form (Certificate of Coverage) to ensure they continue to pay social security contributions in their home countries.
Whether the Czech Republic has a social security contract in place with a non-EU national’s origin state, as well as the period of the expatriate’s secondment, are factors which are taken into account in relation to the relevant insurance determinations.
Social insurance rates include an employer contribution of 24.8% (25% until July 2019) on behalf of the employee as well as a 6.5% withholding from the employee’s salary.
The maximum basis of assessment for 2023 is 1,935,552 CZK.
The basic rules for the health insurance are the same as for the social insurance.
Health insurance rates include an employer contribution of 9% and an employee contribution of 4.5%. There is no maximum basis of assessment for 2023.
Stock option benefits are generally taxable when the option is exercised. The benefit is equal to the difference between the fair market value of the stock on the date of exercise and the option exercise price.
Wealth tax is not applicable in the Czech Republic.
No other specific taxes would apply to expatriates in addition to those described above.
Tax planning mainly involves the structuring of employment arrangements to take advantage of the relatively low progressive personal income tax rates (as compared to other EU member states). Grant Thornton Czech Republic’s tax team can advise expatriates on these and related opportunities.
For further information on expatriate tax services in the Czech Republic please contact:
Head of global mobility services
Manager - Global mobility services