Outline of the Czech Tax System

Outline of the Tax system in the Czech Republic

Written by Boban Stamenkovic
of
www.etherconsulting.cz

The Czech tax system changed significantly in 1993 bringing it into line with a number of other countries in the European Union. Czech taxes are governed by several Acts, the main ones being the Income Taxes Act which includes corporate income tax and personal income tax, Value Added Tax Act, Road Tax Act, Inheritance, gift and property transfer tax and real estate tax. Social and health insurance contributions are covered by separate legislation.

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SUMMARY OF PRINCIPAL TAXES

A summary of the main taxes are listed in the table below together with social and health insurance contributions for salaries:

Type of Tax

Tax Rates

 

 

Corporate Tax

26% in 2005  (to reduce to 24% in 2006)

 

 

Personal Income Tax

Progressive tax rates starting at 15% rising to 32% for taxable income exceeding CZK 331,200

 

 

Value Added Tax (VAT)

Standard Rate of 19% for most goods and services

Reduced Rate of 5% for certain specified supplies

 

 

Withholding Tax on dividends

Withholding Tax on interest

Withholding tax on royalties

0% to 15% (subject to terms of double tax treaty)

15% (subject to terms of double tax treaty)

25% (subject to terms of double tax treaty)

Companies tax resident in the Czech Republic and EU may be exempt (subject to certain conditions)

 

 

Social & Health Insurance Contributions

Employer´s contributions: 35% of gross salary

Employee´s contributions: 12.5%

 

 

Road Tax

CZK 1,200 – CZK 4,200 for passenger cars

CZK 1,800 – CZK 50,400 for lorries

 

 

Real Estate Transfer Tax

3% of the higher of actual sales price or independent valuation

 

 

Real Estate Tax

Depending on the location, basic tax rates :

– tax on land (CZK 0.10 – 5 per m2)

– buildings tax  (CZK 1-50 per m2 and higher)

                                               

KEY FEATURES OF CORPORATE INCOME TAX 

·        Companies that have their seat or place of management in the Czech Republic are liable to Czech tax on world-wide income. Corporate tax also extends to companies which do not have their seat in the Czech Republic but carry on a trade here. Such companies are liable to tax on their Czech-source income.

·        Corporate tax is payable on accounting profits adjusted for tax purposes after adjusting for non-deductible expenses and non-taxable income. Income that is subject to withholding tax (such as dividends) is not included in the general tax base on which tax is calculated but instead constitutes a special tax base.

·        In order for expenses to be tax deductible, they must be incurred to generate, maintain and assure the taxable income of the company. Types of allowable expenses include, for instance, depreciation, lease payments (except for finance leases where the assets are subsequently acquired), expenses for business trips and reimbursement of travel expenses (up to certain statutory limits). Certain types of expenses are disallowed, for instance, interest payments on loans between related parties are tax allowable up to the limit set by thin capitalisation rules (for tax purposes the debt:equity ratio is normally 4:1) plus the interest rate must be at arm’s length. In the case of loan interest payable by an individual (not using double-entry book-keeping), it is only tax deductible in the period it is paid.

·        Tax losses can be generally carried forward for 5 years against future taxable profits. However tax losses incurred prior to 2004 can still be carried forward for up to 7 years.

·        In the case of Permanent Establishments the tax base must not be different from that which would be attained from a similar activity carried on by a Czech entity.

·        The company´s annual accounts must be prepared in accordance with the Accounting Act and audited in accordance with the Act on Auditors – the rules broadly correspond with those of other EU countries. According to accounting law, an annual audit is only required if in the preceding and current accounting year at least two of the following criteria are met: Turnover exceeds CZK 40 million, gross assets exceed CZK 20 million, average number of employees exceeds 50

·        The company can apply for a change of accounting (and tax) period.  It is necessary to notify the tax authority in writing no later than three months before the start of the new accounting period.

 KEY FEATURES OF PERSONAL INCOME TAX

·        Individuals who are permanently resident in the Czech Republic (as determined by their circumstances) or are usually domiciled here (i.e. spend more than 183 days per annum in the Czech Republic) are considered to be tax resident in the Czech Republic and are liable to Czech tax on their world-wide income. If the individuals are present for less than 183 days, then they are liable to tax only on their Czech-source income. These rules apply to Czech as well as foreigners.

·        Everybody working in the Czech Republic is liable to Czech social and health insurance payments. It is only in the case of short-term secondments that non-Czech nationals may be exempt from contributions to the Czech system. The employer is obliged to deduct tax advances under a payroll deduction scheme and at the end of the fiscal year, any differences between the amount due and amount advanced would be settled the following tax year. It is possible following the end of the tax year to claim tax relief for certain payments such as mortgage interest and life insurance (if the individual´s Czech income exceeds 90% of his/her world-wide income). If the employee received any additional income exceeding CZK 6,000 (except exempt income or, for example, dividends), then he would be obliged to file an income tax return. 

KEY FEATURES OF VALUE ADDED TAX

·        Since joining the EU on 1 May 2004, VAT law has been updated to correspond with EU law. VAT is imposed on taxable supplies of goods and services.

·        There are new definitions in the legislation for input VAT relating to intra-community supplies of goods and the reverse-charge mechanism for the supply of services.

·        A taxable person whose turnover exceeds CZK 1 million in any 12 consecutive month period is obliged to register for VAT within 15 days following the month in which the threshold was exceeded.

·        VAT Returns are normally prepared quarterly (unless the turnover exceeded CZK 10 million in the previous calendar year). The returns are filed by the 25th of the month following the VAT Return period.

USEFUL CONTACTS IN THE CZECH REPUBLIC

Contacts to business information services and Government Departments:

CzechInvest, the inward investment agency:
www.czechinvest.cz

Ministry of Finance:
www.mfcr.cz

Ministry of Interior Affairs:
www.mvcr.cz

Czech National Bank:
www.cnb.cz
           

Czech Trade:
www.czechtrade.cz

Ministry of Industry and Trade:
www.mpo.cz

Ministry of Labour and Social Affairs
www.mpsv.cz
 

 

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