All individuals who have their tax residence in the Czech Republic are taxed to tax on their worldwide income regardless of where it is received. Tax non-residents are liable to Czech income tax on income arising in the Czech Republic – work, activities through a permanent establishment, business, technical or other consultancy services, dividends, interest, licence fees and rents.
TAX RESIDENCE IN THE CZECH REPUBLIC
The Czech tax residence of a foreign individual is determined according to their place of residence or their “habitual stay” in the Czech Republic. The Czech Income Taxes Act considers the place of residence to be the place where the taxpayer has his abode and the circumstances indicate his intention to live there permanently. The “habitual stay” means staying in the Czech Republic for at least 183 days in the relevant calendar year, either continuously or intermittently, each “commenced” day of such stay is included in the period of 183 days. Therefore, the timing of the dates of arrival in, and departure from, the Czech Republic should be considered.
TAXATION PERIOD AND TAX RATE
The taxation period for individuals is a calendar year. A flat tax rate of 15 % is in operation in the Czech Republic. The effective tax rate is usually higher because of the special taxation method of “super gross”, however, after reaching the maximum assessment base the rate decreases back to 15 %. Furthermore, reference should be made with regard to any relevant Double taxation agreements, which may override these rules.
Individuals can lower their tax obligation using deductible items. These can be applied in the annual reconciliation in case of employees or in the tax return. If an employee wants to apply any deductions in the annual reconciliation made by the employer, he/she must submit the necessary documentation to the employer by the 15th of February. The tax base can be lowered by gifts, interest on loans for household needs, blood donation, life insurance, pension insurance or membership fees for labour unions.
The final tax liability of an individual can be reduced by some tax discounts: a personal allowance, for children, for taxpayers with partial disability pensions, for taxpayers with full disability pensions, for taxpayers with severe health disabilities and for students. Some of these discounts can be applied monthly, some of them only in an annual reconciliation or in a tax return.
TAXATION OF RESIDENT EMPLOYEES
The Czech tax law considers an employee to be a person who is obliged to obey the employer’s orders, and therefore, it covers both legal as well as “economic” employers. The tax base for income from employment is a so-called super gross wage which is a gross wage increased by the amount corresponding to obligatory social insurance and general health insurance paid by the employer. The gross wage is, in principle, increased by the actual contributions rate amounting to 34 %. The income over the maximum base of contribution assessment (i. e. 1, 78 Million CZK in 2011) is not increased because no further contributions are to be paid. Most benefits and incomes connected with the employment (e. g. car for private purposes, accommodation above a mandatory limit, transport to the place of work, every bonus) are added in the tax base. Nevertheless, there are some exemptions – e. g. some educational costs, refund of travel expenses, meal allowances.
An “economic” employer is a Czech employer that has foreign individuals working for it without a Czech employment contract. Such individuals are typically employed by a foreign company. In such cases, the economic employer is obliged to act as a payroll agent and must transfer the appropriate income tax payments to the Financial Authority.
CROSS-BORDER EMPLOYMENTS – TAXATION OF NON-RESIDENT EMPLOYEES
Incomes of a Czech tax non-resident from an employment performed in the Czech Republic are basically subject to Czech personal income tax. Nevertheless, reference should be made with regard to any relevant Double taxation agreements, which usually state (in Article 15) the criteria for taxation only in the state of residence. These cumulative criteria are following:
• The employee does not stay longer than 183 days during a calendar/tax year or twelvemonth period in the Czech Republic,
• the employer is not resident in the Czech Republic and
• the employer does not maintain a permanent establishment in the Czech Republic. The taxation method is the same as by Czech tax residents. The tax base amounting to the super gross wage is applied even if employees participate in a foreign contributions system. The most important difference is in the ability to claim tax deductions and discounts. Tax nonresidents (essentially any non-Czech citizens) do not qualify for them automatically. Only the basic tax discount per taxpayer can be provided by the law. The other deductions and discounts are provided only if 90 % of the worldwide income of a tax non-resident is sourced from the territory of the Czech Republic.
BOARD MEMBERS AND MANAGING DIRECTORS
Incomes from work performed by partners and executives in limited liability companies and limited partners in limited partnerships or remuneration paid to members of boards are taxed like incomes from an employment using the super gross concept. Therefore, this kind of income is increased by the actual contributions rate amounting to 9 % for members of boards and 30,5 % for executives, even if they do not participate in the Czech contributions system. Shares in profits are subject to the same taxation method. Nevertheless, shares in profits received by non-resident members of boards are taxed in a different manner – they are subject to a withholding tax amounting to 15 %. Furthermore, reference should be made to any relevant Double taxation agreements, which may override these rules.
TAXATION OF FREELANCERS
The tax base for income acquired by business activities and incomes of freelancers is the difference between revenues and expenses without using the super gross concept as in case of the incomes of employees and board members. In some cases, even for rental income, it is possible to calculate expenses using a determined percentage (from 30 to 80 percent). In such cases it is not necessary to prove the real expenses to the tax administrator