The Czech Republic assesses tax on income based on tax residency, personal characteristics of the payer and the nature of the income. The primary sources of authority for taxation are the Act on Income Tax and the many international treaties on the avoidance of double taxation to which the Czech Republic is a signatory.
The Czech Republic taxes residents (that is, citizens and foreigners who spend more than 183 days in a calendar year in the Czech Republic) on their worldwide income. Worldwide income includes foreign interest, dividends, capital gains, rental and other income. Residents must use foreign-tax credits or re-source income on their returns to avoid double taxation. Non-residents are taxable on Czech source income, only. That means that persons who are present and earn income in the Republic for even part of a year are subject to taxation.
The income tax rate is 15% for all sources of income. There is no separate capital gains tax. Tax may be withheld at source (employment, interest and dividends) or via the submission of tax returns (self-employment, rental income, foreign income and other income). Taxpayers with income solely from employment may settle their tax obligations through their employers and without filing a return.
Employees pay 15% advance tax (zálohová daň) of “super gross” wages, which is equal to 134% of gross wages, resulting in an effective tax rate of 20.1%. Self-employed persons pay 15% of taxable income. Employees on work contracts (dohoda o provedení práce or pracovní činnosti) are subject to income tax withholding (srážková daň).
Self-employed taxable income is generally revenues minus deductible expenses, or, if the payer is using the percentage of revenue method of calculating tax, 40% of revenues, resulting in an effective tax rate of 6%. Meals and entertainment, social insurance and health insurance expenses are not deductible. Rental taxable income is generally revenues minus deductible expenses, or, if the payer is using the percentage of revenue method of calculating tax, 70% of revenues, resulting in an effective tax rate of 10.5%. In order to use the percentage of revenue method of taxation, self-employed taxpayers must be licensed to practice a trade with the trade license regulator (živnostenský úřad). If income is generated from joint property (i.e. rental revenue owned by two or more persons), all owners must use the same method of calculating tax.
Income tax returns are due on 31 March for the prior year. Every taxpayer can request the financial re gulator to extend the filing and payment deadline to 30 June by paying an administrative fee of 300 CZK. It is not necessary to engage a tax advisor.
The late filing of an income tax return from 1 January 2011 will subject the filer to a daily penalty of 0.05% of the due tax, beginning on the 6th day after the due date, amounting to no less than 500 CZK and no more than 300,000 CZK. In addition, the filer will be assessed penalty interest of 0.0005% per day – equal to 18.25% p.a.
There are deductions for mortgage interest (300,000 CZK), government-subsidized pension and private life insurance (12,000 CZK each), charitable tax donations (10% of tax base, minimum 1,000 CZK) and union dues (3,000 CZK).
Any taxpayer filing a return or earning income from employment with a Czech employer is eligible for a personal tax credit of 23,640 CZK. Self-employed persons may claim losses for up to 5 years to the extent of taxable income. If taxpayer has a spouse whose income from all sources (including State benefits payments) is less than 68,000 CZK, s/he may claim a spousal credit of 24,840 CZK. Taxpayers may also claim a child tax credit of 967 CZK/month for each child that lived in the household or was a university student up to age 26. Income subject to income tax withholding is not reportable on a tax return and is therefore not eligible to be offset against personal tax credits or deductions.
This is but a brief summary of income tax for individuals. International taxpayers, especially those that need to file a tax return in their home countries, should contact an accounting professional with competency both in the tax jurisdictions of the taxpayers’ home countries and the Czech Republic. You can find details on the pages of Expats.cz.
