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Employee benefits and taxation in the Czech Republic | eBook

December 13, 2023
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Czech

The government’s consolidation package signed by the President of the Czech Republic on 22 November 2023 (Parliamentary Print 488) will have a major impact on the employee benefits and taxation in the Czech Republic. The amendment is now awaiting publication in the Collection of Laws. In addition, some benefits will be affected by the Parliamentary Print 474, which also discusses adjustments to retirement savings products and the taxation of employee stock plans. The latter was approved by the Chamber of Deputies on 15 November 2023.

We have prepared an overview of the most important changes that will affect this area and that result (not only) from the amendments mentioned. Most of these changes are expected to come into effect on 1 January 2024. Those changes, that are expected to be valid later, we indicate the relevant date directly in the text.

Download our eBook on employee benefits and taxation in the Czech Republic, or read more below

Income tax and insurance of employees

Limit reduction for the application of the second tax rate

Monthly limit for the application of the second tax rate (23 %) in process of calculating the tax advance on income from dependent activities will be decreased from current four times of the average monthly salary to three times of the average monthly salary, i.e. the amount of CZK 131,901 (for 2024 the average monthly salary will amount to CZK 43,967 according to Regulation No. 286/2023 Coll.). In total, income up to CZK 1,582,812 per year will be taxed at a rate of 15% and the amount exceeding this amount will be taxed at a rate of 23%.

Example: An employee with an income of CZK 2,000,000 will apply tax rate of 15% on CZK 1,582,812 in 2024 and tax rate of 23% on the remaining CZK 417,188. His tax burden will increase as follows:

  2023 2024
Tax rate 15% CZK 290,333 CZK 237,422
Tax rate 23% CZK 14,823 CZK 95,953
Total tax liability CZK 305,156 CZK 333,375

Sickness insurance – employee’s part

As of 2024, employees will start paying sickness insurance as a part of their social security contributions, at a rate of 0.6% of their assessment base (gross wages). Currently, only the employer pays sickness insurance. The employee’s social security contribution will be 7.1% instead of 6.5%.

Maximum assessment base for social insurance contribution

The maximum annual assessment base for social security contributions for 2024 will be CZK 2,110,416 (48 times the average wage). This assessment base is linked to the employer. In case of multiple employers, the employee with the higher income in total can claim the resulting overpayment of insurance premiums.

Cancellation and limitation of certain tax benefits

Starting 2024 there will be cancellation or limitation of tax benefits, i.e. tax discounts and deductions from the tax base. Specifically, the following changes will come into action:

Discount on husband/wife living together with a taxpayer in a shared household, if his/her annual income does not exceed the amount of CZK 68,000, will be now claimable only if he/she takes care of a child in age up to 3 years.

Cancellation of student tax discount.

Cancellation of the tax relief for the placement of a child to a kindergarten.

Cancellation of a possibility to apply tax deduction for contribution paid to the trade union.

Cancellation of a possibility to apply tax deduction for exams verifying the results of further education.

Agreement to complete a job – changes in insurance, withholding tax

According to the current legislation incomes arising from agreements to complete a job with a reward up to CZK 10,000 are not a subject to social security. Up to this limit the withholding tax is applied. As of 2024, two new limits will be introduced for the participation of such employees in the insurance:

  1. Working for one employer up to 25% of an average salary (CZK 10,500)
  2. Working for more employers up to 40% of an average salary (CZK 17,500).

If the limit is exceeded there will be an obligation for employer to pay contributions to social and health insurance. Employees will become payers of insurance if they fail to fulfil the notice obligation to their employer, who fulfilled his notice obligation to the employees, and are claimed to be payers by the Czech social security administration.

First of limits above (25 % of average salary) will be connected to application of withholding tax. The withholding tax limit will be assessed separately for each employer (i.e., not in total for all employers).

This change was originally supposed to take effect from 1 January 2024, but was eventually postponed by the Chamber of Deputies until 1 July 2024.

Employer’s compliance with the creation and observance of working conditions for the work performance

Under the current legislation, income from employment is not considered to be “compulsory payments made by the employer to create and maintain working conditions for the performance of work as provided for by law”. The new wording ‘compulsory’ and ‘provided for by law’ will be deleted. Employers will thus be able to use this provision also for non-mandatory performances. The practical application will certainly be corrected in the future by information from the GFD or an amendment to Instruction D-59.

Limit for filing of tax return by employee

Until now, employees were obliged to file a personal income tax return (and thus could not ask their employer for an annual tax reconciliation) if their taxable income arising from other sources but employment exceeded CZK 6,000. This limit has now been increased to CZK 20,000 and will apply already when settling tax obligations for 2023.

Setting of the limit for the exemption from taxation of other incomes (from the perspective of Annual Tax Reconciliation)

In order to simplify the system of taxation of small incomes, a general limit for exemption of other incomes up to CZK 50,000 per year will be introduced. Other incomes can then be divided into the following groups in terms of the application of the limit:

  1. A group where the exemption limit applies cumulatively for each type of income – this includes, for example, the following types of income:
  • cultural awards,
  • income from the state contribution to building savings,
  • income from exchange gains on the exchange of money from a foreign currency account,
  • incidental and non-recurring income from non-business activities and rental of movable property.

2. A group where the limit is assessed for each individual type of income – this is income that is taxed by withholding tax or in a separate tax base. This includes:

  • share of the liquidation balance (except for the partner of public partnership company and limited partnerships),
  • settlement share in the LLC a Cooperative,
  • return of share premium,
  • winnings from lotteries and raffles, advertising contests, public or sporting competitions etc.

3. Incomes derived from abroad will be treated in the same way.

4. The group where the income arises from a breach of the conditions for the application of non-taxable parts of the tax base – the exemption limit does not apply – e.g. improperly claimed interest on a mortgage loan, improper deductions of payments for supplementary pension insurance or private life insurance.

5. Group for which cumulative exemption of gratuitous incomes (gifts, property benefit) up to CZK 50,000 per year applies.

6. Group for which the cumulative exemption of gambling winnings after deduction of gambling deposits applies – up to a total of CZK 50,000 per year.

7. Exemption of income from bee keeping – max CZK 1,000 per bee colony (max 50 bee colonies).

Employee benefits

Limitation of tax-exempt employee’s benefits

Non-monetary benefits in the field of culture, education, purchase of services and goods from medical institutions, recreation and trips etc., which are provided by the employer to the employee or his/her family members, will now be exempt from taxation on the employee’s part only up to half of the average monthly salary for the whole calendar year.

The exemption limit will be CZK 21,983 in 2024. Exemption on the part of the employee up to this amount will be assessed separately for each employer, i.e. if the employee receives non-cash benefits from several employers at the same time, the limit will be assessed for each employer separately. The employee’s taxable and insurable income will be deemed to be the amount in excess of the limit.

In connection with this change, the tax (non)deductibility on the employer’s side will be adjusted. The tax non-deductibility on the employer’s part will now be linked to the exemption on the employee’s part. That is, expenditure on non-monetary benefits will always be tax non-deductible if it is also exempt on the employee’s part. Excess benefits might be tax deductible on the employer’s part (the entitlement should be based on an internal regulation, collective agreement or employment contract).

Examples:

  1. Employer provides its employees with participation in the Multisport programme. The amount of CZK 1,000 per month for each employee is paid to the third party, of which CZK 750 is paid by the employer and CZK 250 by the employee. If the employee participates in the programme, the non-cash benefit on the employee’s part will be exempt from tax and insurance premiums, as the total amount of the benefit for the whole year is CZK 9,000 (12 x CZK 750). This amount is not tax deductible on the employer’s part.
  2. Employer also decided to provide alongside Multisport programme a membership in a private medical clinic that costs CZK 2,500 per month. Total non-cash benefit from the employer will cost CZK 3,250 monthly (CZK 39,000 per annum). If the employee decides to take part in both programmes, the exempt part of benefits will be only up to the limit on the part of the employee, e.i. CZK 21,983. The amount of CZK 17,017 will be subject to income tax and social security and health insurance contributions. On the employer’s part the amount of CZK 21,983 will be tax non-deductible, however the rest of the total amount, CZK 17,017 will be tax deductible.

Basic overview of the benefits that fall within this limit is to be found below:

  BENEFIT Comment
1 Language, educational courses, tuition fees for employees (non-work related)

The entitlement for tax deductibility must be based on an internal regulation/contract.

Based on a recent court decision, income on the part of the employee is exempt from tax even if the employee pays for the goods or services himself and is reimbursed by the employer. The decisive factor in this case is that the funds are used for the purpose and the employee can prove that he/she has actually spent them.
2 School fees paid for employee’s children
3 Contributions to the purchase of goods or services from a health care facility (private health care, vaccinations, glasses, psychological services…)
4 Contributions to cultural and sport events, use of physical education or sports facilities (including children’s camps, various tickets, Multisport cards)
5 Cafeteria/flexipasses and other vouchers with the purposes defined above
6 Recreation or tours
7 Books, employer’s libraries

The limit does not include the employee’s training for professional development related to the employer’s business area, employee meals provided by the employer (including meal vouchers, cash meal allowance), pension and life insurance contributions, statutory medical examinations provided/reimbursed by the employer, company events (see below), income arising from share and option plans, goods and services provided to employees at discounted prices, cash benefits provided to employees in addition to salary, vehicle provided also for private purposes, etc.

For some benefits it will be difficult to determine the amount of non-monetary income. This is particularly the case where the employer pays a monthly fee to third parties for all employees or, for reasons of discretion, the employer has not yet required records of which employee has used the benefit, e.g., psychological services.

Cancellation of gifts up to CZK 2,000

Further, the exemption for non-monetary gifts to employees up to CZK 2,000 provided under the CSNF (cultural and social needs fund) will be abolished. Gifts, unless one of the purposes listed in the previous paragraph is fulfilled, will always be subject to tax and insurance. However, this will not be a major impact for employers as the practical application of the exemption has already been very limited.

Introduction of tax-exempt corporate events

A new part will be added to the legislation and will exempt events organised by employers for employees and their family members (e.g., St. Nicholas Day parties, company parties) from tax and insurance. For the tax exemption it is necessary that the scale and form is customary and reasonable, i.e., as provided, for example, until now. Another condition is that the events must be non-public.

Unification of the tax treatment of various forms of meals provided by an employer

As of January 2024, the tax treatment of all forms of employee meals – meal vouchers (as meals provided by other entities), cash meal allowances, and meals provided as a non-monetary benefit for consumption at the employee’s workplace (or the employee’s own catering facility) – will be unified. Expenses incurred to fulfil employees’ rights relating to their working and social conditions (including meals) arising from a collective agreement, an employer’s internal regulation or a contract concluded with the employee will now simply be tax deductible. This will also remove the limit for tax deductibility on the employer’s part for meal vouchers.

For employees, the exemption of the meal allowance for all forms of meals will be unified up to 70% of the upper limit of the meal allowance that can be granted to employees for a business trip lasting 5 to 12 hours (currently CZK 107.10likely to change). On the employee’s side, the condition of the employee’s presence at work lasting at least 3 hours will be added for exemption (until now this condition was only for tax deductibility on the employer’s side). For shifts lasting at least 11 hours, it will be possible to grant double the amount. The amount above the relevant limit will be the employee’s taxable income subject to social security and health insurance contributions (both on the employee’s and the employer’s side).

In practice, the question arises whether this limit should also be applied, for example, on small snacks (fruit, biscuits, etc.) provided by the employer during meetings/at the workplace. The prevailing professional opinion is that it is not about meals, but about providing working conditions conducive to the efficient performance of work, i.e. it is not about the employee’s income. Also, the limit should not apply to working breakfasts or lunches attended by the employee in the course of his/her duties (e.g. lunch with a business partner of the employer).

Example: If the employer provides the employee with a meal cooked in its own catering facility worth CZK 200 per 8-hour shift on the basis of an internal directive, it will be a tax-deductible expense on the employer’s side (i.e. the value of the food will not have to be included in non-tax expenses), on the employee’s side the amount of CZK 107.10 (the amount valid for 2023) will be exempt from tax and insurance, and the amount of CZK 82.90 will be subject to taxation and insurance. If it was a 12-hour shift, the whole amount would be exempt.

Reduction of the rate for the determination of non-monetary income for the usage of company’s emission-free cars

The amount of the employee’s monthly non-monetary income when using the vehicle for private and business purposes will be 0.25% for emission-free vehicles, 0.5% for low-emission vehicles and 1% of the purchase price for other vehicles. The minimum amount that must be included in the employee’s salary as non-cash income will remain unchanged. This is set at CZK 1,000.

Emission-free vehicle for income tax purposes represents a road motor vehicle that uses only electricity or hydrogen as fuel, or another road motor vehicle whose operation has no CO2 emissions.

Usual price in case of sale of an apartment to an employee

New principle of measurement of the value of the flat at its normal price is now applied when selling a company flat to an employee while any difference between the price paid by the employee and the normal price is taxable and insurable income for the employee. This rule does not apply where the employee has resided in the unit until the end of 2023.

Employee shares – taxable event, exemption on sale

Employees who participate in employer stock or option plans under the current approach realizing taxable income at the time they purchase shares at a discount or receive free shares. The new proposal is to defer the realization of income until specifically designated times (typically the sale of the stock). If the specified time did not occur, the income would be taxed after 10 years from the acquisition of the share. This proposal is part of Chamber of Deputies press 474.

If the employee decides to sell the shares, the income from the sale of the securities is now tax-free, if the income does not exceed CZK 100,000 (value test) or if the period between the sale and the acquisition of the security exceeds 3 years (time test). Speaking of income from the sale of stakes, the time test for exemption is 5 years. As of 1 January 2025, income from such sales will be exempt only up to CZK 40,000,000 per taxpayer per tax period. The amount exceeding this limit will be subject to taxation. Expenses related to non-exempt income, i.e. purchase price, fees, etc., will be allowed to be claimed against taxable income, and the market value of securities and shares as of 31 December 2024 that were acquired before 1 January 2025 will also be allowed to be claimed as an expense instead of their purchase price.

Other related changes

Extension of retirement savings products

As of 2024 there should be introduced brand new product for retirement savings, i.e. long-term investment product („LIP“) and long-term care insurance. In the case of LIP, it will represent investments in publicly traded financial products such as equities, EFTs, corporate and government bonds, mutual funds, etc. LIP will only be offered by banks, credit unions, securities dealers, self-managed investment funds and foreign persons with similar activities. 

Taxpayers will be able to deduct from the tax base contributions to all tax-supported retirement savings products (supplementary pension insurance, life insurance, LIP and long-term care insurance) up to CZK 48,000 per year (today the limit is CZK 24,000 for supplementary pension insurance and supplementary pension savings and CZK 24,000 for life insurance).

There will be a possibility for employers to contribute to all these products. Similar to pension and life insurance, the employer’s contribution will be tax-free for employees up to CZK 50,000 per year. This limit also applies for all products of retirement savings mentioned above. On the employer’s side, it will be a tax deductible expense if the provision of such a contribution is anchored in an internal directive or collective agreement.

Unlike pension insurance, the long-term investment product will not be subject to a state contribution. Similar to pension and life insurance, the condition that the long-term investment product must be contracted for a minimum period of 120 months and can be terminated no earlier than in the calendar year when the taxpayer reaches the age of 60 will apply. If the taxpayer does not comply with these conditions and withdraws the money earlier, he would have to tax any benefit claimed.

Product

Min. contribution

Max. deduction from tax bas

Monthly contribution for max. tax savings

Max. tax relief

Long-term investment product

From CZK 1

Up to CZK 48,000 per annum

CZK 4,000

CZK 7,200 per annum

Pension insurance

From CZK 1,700*

Up to CZK 48,000 per annum (only contributions above CZK 1,700)

CZK 5,700

CZK 7,200 per annum

* In addition to the introduction of a long-term investment product, there are also plans to modify the conditions for applying for pension insurance. Only those who contribute at least CZK 1 700 per month will receive the maximum state contribution of CZK 340.

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