The essential Tax Law in Czech Republic

Czech Republic’s tax system is broadly based upon other taxation systems in the EU. The regulations were drawn up at the beginning of 1990’s and came into force in 1993. Value-added tax and excise duties were adjusted in 2004, upon Czech Republic’s EU accession. Tax laws are subject to frequent amendments, one of the major amendment was adopted together with the new Czech private law, effective as of 2014.

Income taxes

Income taxes for both individuals and legal entities are regulated by Act No. 586/1992 Coll., on Income Taxes, as amended. Income tax is levied on the worldwide income of Czech residents and on foreign entities whose place of management/control is located in the Czech Republic. For non-resident entities, only income which is generated in the Czech Republic is subject to the income tax.

Individual taxes

Individuals who are physically present in the Czech Republic for 183 days or more in a calendar year or who have established a permanent residence in the Czech Republic are treated as tax residents and are generally subject to taxation on their world-wide income in the Czech Republic. Individuals who spend less than 183 days in a calendar year in the Czech Republic and do not have a permanent residence in the Czech Republic are treated as tax non-residents. They are liable to taxation on their Czech-source income, however, only subject to the provisions of the respective double taxation treaty.

The following types of income are subject to individual income tax:

INCOME FROM DEPENDANT ACTIVITIES AND FUNCTIONAL BENEFITS: It includes all income arising from employment, membership relationship, or a similar kind of relationship in which the taxpayer is obliged to follow his employer’s instructions and income paid to Executive Directors and members of statutory bodies of legal entities. In addition to the basic salary, cash allowances and bonuses, the employment income also includes non-cash benefits provided to employees (e.g. company cars used for private purposes etc.).

INCOME FROM BUSINESS ACTIVITIES AND OTHER SELF-EMPLOYMENT: It consists of income from business activities and professional services reduced by deductible expenses. Different lump-sum expenses can be deducted for defined groups of individuals (e.g. expenses in amount of 80% of income for craftsmen, 40% of income for doctors, legal and accounting advisors etc., however calculated from limited amount of income);

CAPITAL GAINS: Capital gains are defined as the difference between the proceeds from the sale of an item and the cost of its acquisition plus any improvements. In the Czech Republic, capital gains are taxed as ordinary income. The sale of securities is exempt from taxation if the shares have been held for a period of more than 3 years or if total income from the sale of securities does not exceed CZK 100,000 (approx. EUR 3,840) for individual taxpayer per tax period.

INCOME FROM LEASES: Income from the lease of the real estate or movables. Lump-sum expenses in amount of 30% of income (maximum CZK 300,000, approx. EUR 11,520) may be deducted.

OTHER INCOME (INHERITANCE AND GIFT TAX): Among other things, inheritance and gifts are taxed within this category. All income from inheritance is an exempt from tax. Income from gifts is an exempt from tax provided that the donor and the gift recipient are relatives or if they share the same household for more than 1 year. Moreover, income from gifts is an exempt also if the gifts are received occasionally and the value of the gifts from one donor is less than CZK 15,000 (approx. EUR 576) per tax period.

The flat rate income tax of 15 % is currently applicable and will most likely remain in force at least till the parliamentary elections held in Autumn 2017. Since the transition to progressive tax system is currently not one of the main political topics, no fundamental change in this matter is expected. However, minor changes of the tax rate during 2018 or 2019 could not be ruled out.

Various tax discounts are also applicable. Any individual with a taxable income has a discount on income tax in the amount of CZK 24,840 (approx. EUR 953.9) per year, increased in case of having any children. Additional discount in the same amount may be applied in case that the taxpayer’s spouse has a taxable income lesser than CZK 68,000 (approx. EUR 2,611) in a year (e.g. spouse on maternity leave etc.).

The taxable period for personal income tax purposes is the calendar year. Personal income tax returns must generally be filed by 31 March following the end of the tax year. This is extended to 30 June if a qualified Czech tax adviser prepares the return and the relevant power of attorney is filed with the Financial Authorities before 31 March.

Income tax prepayments are generally required either quarterly or semi-annually during the year based on the previous year’s tax liability. Payment of any residual tax due must be made by the respective tax return filing deadline. Special rules apply for payroll tax withholdings on taxable income derived from employment.

Corporate Income Taxes

Corporate income tax is levied on the worldwide income of Czech legal entities and on foreign entities whose place of management/control is located in the Czech Republic. For non-resident entities, only income which is generated in the Czech Republic is subject to corporate tax.

Czech general and limited partnerships are, for corporate income tax purposes, treated as fiscally transparent entities. The profits of a general partnership are not taxed at the company level, but at the level of the partners. Also, profits which are attributable to the general partners of a limited partnership are taxed at the partners’ level, whereas profits which are attributable to limited partners are taxed at the company level.

The corporate income tax rate of 19 % is applicable for the tax period of 2017 and will probably remain for 2018.

Investment funds, mutual funds and pension funds are subject to 5 % tax. Corporate income tax is generally payable on trading results (profits or losses) as reported in Financial Statements after an adjustment of various assessable/non-assessable and deductible/non-deductible items has been carried out.

Generally, the taxable period for Czech corporate income tax purposes is the calendar year or the financial year. Calendar year tax returns for corporate income tax must generally be filed by 31 March following the end of the tax year. This is extended to 30 June if a qualified Czech tax adviser prepares the return and the relevant power of attorney is filed with the financial authorities before 31 March or the company is required to have a statutory audit.

A corporation may change its accounting and tax period from the calendar year provided it notifies the financial and tax authorities at least three months before the end of the calendar year or three months before the start of the planned accounting and tax period.

Special rules apply for filing in the case of liquidations, mergers and transformations.

Value-added tax

VAT is primarily regulated by Act No. 235/2004 Coll., on Value Added Tax, as amended, which is a transposition of the European Union Directive No. 2006/112/ES, on the Common System of Value Added Tax. VAT is generally chargeable on:

• Supplies of goods and services for consideration during the course of his economic activities with a place of supply in the Czech Republic.
• The import of goods into the Czech Republic (administered by the customs authorities, unless VAT is applied directly through a VAT return).
• The intra-community acquisition of goods for consideration effectuated by a taxable person in the course of his economic activities or non-taxable legal person in the territory of the Czech Republic.
• Intra-community acquisition of new goods meant for transport for consideration effectuated by a non-taxable person.

In 2016, control reporting of VAT transactions was introduced. According to the new amendment, VAT payers shall provide the tax authorities with an electronic detailed list of completed transactions concerning VAT in monthly terms. Tax authorities may impose fines on persons breaching their duty to report the transactions in due time.

Another recently-introduced change to the VAT is the “reverse charge” mechanism of VAT payment for certain types of goods/services, meaning that the liability to pay VAT is transferred to purchaser (i.e. the receiver of the goods/services) instead of the seller/provider of the service, who is primarily liable for payment of VAT. Examples of “reverse charge” types of transaction are construction or installation works, telecommunication services, purchase of waste and scrap, etc.

Real estate related taxes

The real estate tax is imposed on real property. The tax rates depend on the type/purpose of the building or land, the size and desirability of the locality and the size of the building or land, however the amount of tax for standard types of real property is relatively low. Real estate tax returns must be filed by 31 January of a calendar year. Real estate tax is payable by 31 May and if exceeding CZK 5,000 (approx. EUR 192) it may be divided into two instalments, payable by 31 May and 30 November of the current year; several types of exemptions are available.

Transfer of real estate is subject to transfer tax amounting to 4 % of the purchase price (with some exceptions). Taxable person is the acquirer of the real estate and the tax is payable within three months of the month of registration of the transfer. Transfers without consideration (i.e. inheritance, donation etc.) are exempted from the transfer tax liability.

Road tax

Road tax only applies to vehicles registered in the Czech Republic, used in the Czech Republic in connection with business activity (except for publicly beneficial entities). Vehicles used exclusively for private needs are exempt. The tax for passenger cars is calculated from the car’s engine capacity, for heavy-goods vehicles it depends on the number of axles and the total weight. All advance payments are generally due by April 15, July 15, October 15 and December 15, respectively.

The law also sets out a toll for the use of highways, applicable to all vehicles – passenger and freight, used for business or private travel. The fee for heavy-goods vehicles is charged per kilometer travelled using an electronic system; passenger cars pay a fixed sum and get a vignette which is to be placed on the front glass of the car. Extension of the electronic system to all vehicles and some other types of roads is being considered.

Inheritance tax, Gift tax

Inheritance and gift are taxed within the income tax, see above.

Environmental taxes

Taxes referred to as environmental are governed by Act No. 261/2007 Coll., on Stabilization of Public Budgets, as amended, and are introduced in accordance with EU regulations. They include natural gas tax, solid fuels tax and electricity tax.

Excise duty

Goods subject to excise duties are mineral oils, alcohol, alcoholic beverages and tobacco products. Similar to the value-added tax, excise duties are also harmonised with European Union’s regulations. These taxes are administered by customs authorities.

Tax administration

Tax administration is regulated by Act No. 280/2009 Coll., on the Tax Procedure Code, as amended. The administration is carried out by the Tax Authorities and, in some cases, customs authorities under the Ministry of Finance of the Czech Republic. Tax returns may also be filed electronically via data boxes (datová schránka), an electronic tool used for communication and document exchange between public authorities and legal or natural persons engaged in business activities.

EET (electronic evidence of receipts)

In 2016, electronic evidence of receipts has been introduced by the Ministry of Finance to increase tax revenues and fight tax evasion. Some types of services providers (doctors, legal and accounting advisors, car services, craftsmen) shall join to electronic evidence of receipts later in March 2018 and June 2018. In connection to this, entrepreneurs must now print receipts for any sales using special software which automatically registers the receipts within the database of Ministry of Finance. If the receipt is not registered right away (e.g. due to internet issues), the entrepreneur must send the receipt to the tax authority via data box within 48 hours after the sale/service is performed. Avoiding the evidence of the receipts is an administrative delict, fineable by the Tax Authorities.