2023 Tax Guideline for the Czech Republic

General rules on purchasing of real estate

The real estate investor can acquire real estate located on the territory of the Czech Republic by way of an asset deal (e.g. direct acquisition of real estate) or a share deal (e.g. acquisition of a corporation owning real estate).

Asset deal

Foreign entities (natural or legal) may directly acquire real estate in the Czech Republic.

Share deal

As an option, the investment can be done through a resident corporation which directly owns the real estate.

1) In the case that the general partners are individuals, personal income tax rate of 15% applies.
2) In the case that the general partners are corporations, the corporate income tax rate of 19% applies.
3) Tax base attributable to limited partners is taxed at the level of the partnership at 19% corporate income tax rate.
4) Exchange rate used – 24.000 CZK/EUR, rounded to the nearest 10.

General social security and health insurance

1) The contribution is voluntary.

Social security and health insurance assessment base of an employee is derived from taxable employment income. In case of sole entrepreneur, the assessment base is calculated as the half of the personal income tax base.

The maximum base for social security contributions amounts to CZK 1,935,552 (approx. EUR 80,648) per year/per employer.

If the assessment base exceeds the limit, the amount of income that is above the limit is not subject to social security. When an employee has more than one employer during the year, the limit for social security contributions (24,8%) is applicable for each employer separately.

Residents of the EU are covered by the provisions of EC Regulation 883/2004 regulating social security and health insurance rules in case of cross-border activities. If non-EU residents work in the Czech Republic or Czech nationals work in a third country a bilateral social security agreement may provide for the applicable social security legislation (where such agreement is concluded). Provided that a bilateral social security agreement is not concluded, the local legislative applies only.

General comments on Czech labour law

Corporate income tax (“CIT”) – rates

Corporate income tax is levied at a general rate of 19%.

Corporate income tax rate of 5% applies to basic investment funds. Pension funds are subject to tax rate of 0%.

Corporate income tax – general information

Residence

A company is treated as resident if it has its legal seat or place of effective management in the Czech Republic.

Taxable income

Resident companies are taxable on their worldwide income. The taxable income is calculated on the basis of the accounting profits according to Czech accounting regulations and is adjusted for tax purposes. Non-resident companies are taxed only from Czech source income.

Tax period

The calendar year or the fiscal year.

Tax returns and assessment

The taxpayer has the obligation to calculate the tax due in the corporate income tax return (self-assessment). The time-limit for filing the tax return is generally three months after the end of the tax period. If the CIT return is filed electronically, the time-limit for filing the tax return is four months. If the CIT return is filed by a tax advisor or the taxpayer is subject to a statutory audit, the time-limit for the submission of the CIT return is six months.

Tax advancement

Advance payments have to be paid semi-annually, if the last known tax liability is between CZK 30,000 – 150,000 (approx. EUR 1,250 – 6,250). Then the advance payment is 40% of the tax liability.

If the last known tax liability is higher than CZK 150,000 (approx. EUR 6,250), the advance payment is ¼ of the previous tax liability and is paid quarterly.

Deductions

Generally, expenses incurred in obtaining, ensuring and maintaining taxable income are fully tax deductible, unless they are listed as non-deductible items or items which are deductible only up to a limit set by the law.

Deductions on research and development

Expenses on research and development projects can be deducted from tax base up to 100%, resp. 110% of the expense. In fact, research and development costs are claimed twice, because the cost of research and development project remains in the calculation of the tax base. Deduction can be made for up to 3 years.

Education tax deduction

Companies can obtain tax deductions in two forms. A deduction for assets acquired for professional education, can be made twice:

Companies providing professional education can deduct CZK 200 (approx. EUR 8) per hour of educational activity, which is the second form of deduction.

Tax losses

Tax losses derived after 1993 may be carried forward for 5 tax years.

Starting from July 2020, the tax losses can be carried backwards for 2 tax years. The maximum amount that can be claimed is CZK 30 million (approx. EUR 1,250,000).

Exemption from taxation

The following types of income are tax exempt:

There are several conditions which must be met to be able to claim the exemptions in the situations 1-3 above. The key condition is that the parent company holds at least a 10% share in the subsidiary for at least 12 uninterrupted months. Income under situation 1 above is tax exempt if it is paid to a resident of Switzerland, Norway, Iceland and Liechtenstein as well.

Incentives

Investment incentives are available to Czech Republic seated entities owned by both Czech and foreign investors for the following supported areas:

While meeting the conditions, investments incentives can be provided in the following forms:

• Income tax relief for up to 10 years
• Financial support for creation of new jobs
• Financial support for training and retraining new employees
• Financial support in the case of strategic investments in manufacturing or in technology centers
• Transfer of public land at a favourable price
• Real estate tax exemption for up to 5 years
• Grant of investment incentives is subject to government approval

Withholding tax

Dividends

Dividends paid to residents and non-residents are subject to 15% withholding tax.

However, under the EU parent-subsidiary directive, dividends paid from subsidiary to parent company are exempted from taxation under the following conditions. Dividends paid from a subsidiary (CZ, EU) to its parent company (CZ, EU) are exempted from taxation, if the parent holds at least a 10% share in the subsidiary for at least 12 uninterrupted months. Similar treatment applies also to dividends paid by a CZ subsidiary to a parent company seated in Norway, Iceland, Switzerland and Liechtenstein.

Withholding tax of 35% applies when dividends are paid to other jurisdictions than EU/ EEA states or states with which the Czech Republic did not conclude a double tax treaty.

Interest

Interest paid to non-residents is subject to a 15% withholding tax. Exemption can be applied when interest is paid by a Czech resident to a company with permanent residency in the EU, Switzerland, Norway, Iceland or Liechtenstein. Taxpayers from EU/EEA are permitted to file a tax return to deduct costs related to interest payment.

A 35% rate applies when interest is paid to other jurisdiction than EU/ EEA states or states with which the Czech Republic did not conclude double tax treaty.

Royalties

Royalties paid to non-residents are subject to 15% withholding tax. Royalties can be exempted from taxation when paid from Czech tax resident to company from EU member state, Switzerland, Norway, Iceland or Liechtenstein. Taxpayers from EU/EEA are permitted to file a tax return to deduct costs related to royalties.

A 35% rate applies when royalties are paid to other jurisdiction than EU/ EEA states or state with which the Czech Republic did not conclude double tax treaty.

Anti-avoidance rules

Thin capitalization

It is prohibited to deduct interest expenses from loans provided by related parties when the sum of loans during a tax period exceeds six times the equity if the recipient of a loan is a bank or insurance company or exceeds four times the equity for other recipients of loans.

Excessive borrowing costs

Excessive borrowing costs are tax deductible only up to a predefined limit. The limit is set at 30% of tax profit before taxes, interest, depreciation, respectively CZK 80 million.

At the same time, the Income Tax Act allows the tax base or the difference between income and expenses to be reduced in the following tax periods by amounts that have under the proposed rule increased the tax base or the difference between income and expenses in previous periods. The mentioned reduction of the tax base or the difference between income and expenses is allowed in a tax period in which the taxpayer does not reach the limit of excessive borrowing costs.

Controlled foreign company

In determining its tax base, the controlling company considers the so-called included revenues achieved by the controlled foreign company. Included revenues cover e.g. license fees, dividend income, income from sale of ownership share, income from sale of goods and provision of services from/to affiliates without added value/ with little added value, insurance, banking and other financial services, etc.

The so-called included revenues form part of the tax base of the controlling company in proportion to the share capital of the controlled foreign company. The adjustment of the tax base of the controlling company by the included revenues shall not be done provided that such an adjustment would lead to decrease of the tax base of the controlling company.

DAC6

The Czech Republic implemented DAC VI EU guideline under which cross-border arrangements the implementation of which can lead to a tax advantage must be reported to tax authorities. The first reporting deadline was set at 31 January 2021.

DAC7

The Czech Republic implemented DAC VII EU guideline that requires operators of digital platforms in the EU to report information about their providers.

The directive impacts platforms with the following activities:

• Rental of immovable property, both residential and commercial
• Rental of any mode of transport
• Providing personal services
• Sale of goods

The first reporting period is scheduled for 2023 and the first reporting deadline is set at 31 January 2024.

Transfer pricing

The transfer pricing rules apply between related parties (both resident and foreign). Parties are related if one has direct or indirect participation of 25% in capital or voting rights of the other party. Parties can also be related when the same person participates in management or control of both parties.

When prices in transaction between related parties differ from market prices and the difference is not justified, tax base is adjusted by the difference.

International aspects

Double tax treaties

Elimination of double taxation (credit or exemption) is available under the relevant double tax treaty. The unused part of foreign tax may be deducted as a tax expense in the following period.

Personal income tax – rates

The abolition of the concept of super-gross salary has introduced progressive taxation of individuals with the effect from 2021. The tax rate of 15% is applied to income up to CZK 1,935,552 (approx. EUR 80,648)/monthly employment income up to CZK 161,296 (approx. EUR 6,720) and the tax rate of 23% is applied to income exceeding this amount for 2023.

Certain types of income are not aggregated but are subject to a special final withholding tax of 15% or 35%.

Personal income tax – general information

Residence

Individuals who have their permanent residence or habitual abode in the Czech Republic are treated as Czech tax residents. An individual has his/her habitual abode in the Czech Republic if he/she is present in the Czech Republic for at least 183 days (in aggregate) in a calendar year (except individuals who stay there for the purposes of studying or receiving medical treatment). All other individuals are treated as Czech tax non-residents. Should an individual be also regarded as a tax resident in another country based on the other country’s domestic law, the double tax treaty determines his/her final tax residency status based on tie breakers stipulated in the respective double tax treaty.

Taxable income

Individuals who are residents for tax purposes in the Czech Republic are taxed on their worldwide income. Czech tax non-residents are taxed only on Czech source income only. Taxable income of an individual is usually calculated by aggregating the separate net results of the following income categories:

Related expenses can be applied only for the income from the independent activity, rental and other income. Specific exemptions and deductions differ for each income category, for the income from the independent activity and rental income, expenses can be applied as a percentage of income or as actual expenses.

Tax base for the employment income used to be calculated as super-gross salary, i.e. gross income increased by social security contributions and health insurance paid by an employer. From 2021, tax base for the employment income will be taxed directly by the tax rate of 15% or 23%. For 2023, the second tax rate is applied on income exceeding the annual amount of CZK 1,935,552, approx. EUR 80,648 / monthly amount of CZK 161,296, approx. EUR 6,720.

Exemption from taxation

There are several exemptions from taxation stipulated in the Income Tax Act e.g.:

• Income from sale of house or flat is exempted from taxation, if the seller has a permanent residence for at least 2 years before the sale.
• The time test for exempting income from the sale of real estate not used / intended for residential purposes was extended from 5 to 10 years. Income from sale of immovable asset is exempted from taxation, when the period of ownership of the asset exceeds 10 years before the sale. This applies to sales of properties acquired after 1 January 2021.
• Income from sale of movable property (some exceptions apply).
• Income from sale of a share in a limited liability company entity is exempted from taxation if the share was held for at least 5 years before the sale.
• Income from sale of securities is exempted if they are held for at least 3 years before the sale or if the total income does not exceed CZK 100,000 (approx. EUR 4,160).
• Social transfers.
• Pensions are exempted up to CZK 622,800 (approx. EUR 25,950).

Tax period

Calendar year.

Tax assessment

Tax return must be filed by 1 April of the following year (paper form) or by 1 May electronically via a data mailbox or with an electronic signature. The deadline can be extended until 1 July if the tax return is prepared and filed by a tax advisor or by an attorney based on a power of attorney. An employee, who does not have to file the tax return, may take part in the process of annual tax reconciliation arranged by the employer, the request has to be signed by 15 February.

Losses

Tax losses generated from independent activities and rental activities may be set off against all types of income (except of employment income). Losses that cannot be set off may be carried forward or carried back. The standard carry-forward period is 5 years. A taxpayer may also claim the tax loss in 2 preceding tax periods up to the maximum total amount of CZK 30 million via a supplementary tax return.

Personal deductions

The following deductions can be applied by an individual:

• Donations – minimum of 2% of personal income tax base or CZK 1,000 (approx. EUR 42), maximum of 15% of personal income tax base.
• The maximum limit for the deduction of interests on a mortgage loan was reduced from CZK 300,000 (approx. EUR 12,500) to CZK 150,000 (approx. EUR 6,250). The lower limit applies to mortgage loans concluded from 1 January 2021.
• Private pension insurance – except for first CZK 12,000 (approx. EUR 500), maximum of CZK 24,000 (approx. EUR 1,000).
• Private life insurance – maximum of CZK 24,000 (approx. EUR 1,000).

Allowances

Basic personal tax relief

In 2023, the annual basic personal tax relief can be claimed in the amount of CZK 30,840 (approx. . EUR 1,285).

Dependent–spouse relief

Allowance of up to 24,840 CZK (approx. EUR 1,035 can be claimed by a resident taxpayer whose spouse does not have annual taxable income higher than CZK 68,000 (approx. EUR 2,830). The basic dependent-spouse relief doubles in case of disability of the spouse.

Other reliefs

Taxpayers with disability may apply a relief from CZK 2,520 (approx. EUR 105) to CZK 16,140 (approx. EUR 670), depending on the extent of the disability.

A relief for students is CZK 4,020 (approx. EUR 170) and can be applied up to 26 years of age.

Children tax allowances

Resident taxpayers are entitled to a tax allowance for each child living in the same household with him. The amount depends on the number of children. Annual tax allowance is CZK 15,204 (approx. EUR 630) for the first child, CZK 22,320 (approx. EUR 930) for the second child and CZK 27,840 (approx. EUR 1,160) for any other child.

All the reliefs and allowances mentioned above are annual and can be applied for any resident of EU/EEC, if the income from the Czech Republic is at least 90% of overall taxpayer’s income.

*If the contributions were already deducted in the past and the related documents were provided to the Czech tax authorities, we do not require these documents.
**Please note that in case of pension insurance/life insurance contributions paid to insurance company seated outside the Czech Republic, all related documents need to be translated into Czech (if not issued in Czech). As tax deduction can be applied contributions paid to an organization within EU.

Value added tax – rates

Standard rate: 21%.

Reduced rate 15% applies on food and non-alcoholic beverage items, plants, special healthcare products or pharmaceutical products etc.

Reduced rate 10% applies on infant nutrition, drugs, vaccines, books, drinking water, sewer rates, public transportation, hotel accommodation, catering, entry to cultural and sport events, minor repair or hairdressing services etc.

Value added tax – general information

Legislation

The VAT rules are based on the principles of the Council Directive 2006/112/EC on the Common System of Value Added Tax. The Directive is implemented in the Czech law by Act No. 235/2004 Coll., on Value Added tax.

Taxable person

Legal entities and individuals that carry on an economic activity.

Taxable event

• the supply of goods and services in relation with an economic activity within the territory of the Czech Republic;
• the intra-Community acquisition of goods for consideration within the territory of the Czech Republic from another EU Member State; and
• the importation of goods into the Czech Republic

Taxable amount

Total consideration charged for the supply, excluding VAT but including any excise duties or other taxes and fees.

Tax period

Calendar month or quarter, based on turnover for 12 previous consecutive calendar months. Compulsory tax period for newly registered VAT payers is calendar month.

Tax assessment

Periodical VAT returns: monthly or quarterly, by the 25^th day of the following month.

The amount of VAT liability consists of the VAT due on supply of goods and services carried out by the entrepreneur less input VAT of the same period.

In addition, taxable person carrying out intra-Community supplies or providing services according to the basic rule for “business to business” services has to file an EC Sales List (that shows the VAT identification numbers of his business partners and the total value of all the supplies of goods and services performed by the entrepreneur) on a monthly or quarterly basis depending on the situation.

VAT control statement

From 2016, VAT registered persons are also obliged to file a recapitulative statement that contains details of transactions subject to VAT in the Czech Republic as well as of transactions where input VAT deduction is claimed.

Reverse charge

Reverse charge applies to the intra-community acquisition of both goods and services. Local reverse charge is applicable in certain cases between two Czech VAT payers.

A permanent reverse charge regime applies, regardless the taxable amount, to supply of gold, supply of intangible property when VAT is included in the price voluntary, supply of construction and installation services and provision of workers who provide construction and installation services and, also to supply of selected goods – mainly scrap.

A temporary reverse charge regime applies, if the total amount of the tax base for the taxable supply exceeds CZK 100,000 to the following commodities:

• corn and industrial crops, including oilseeds and sugar beets,
• metals, including precious metals, except those covered by the special regime pursuant to Article 90 of the VAT Act and those subject to a reverse charge mechanism pursuant to Article 92c of the VAT Act,
• mobile phones,
• integrated circuits such as microprocessors and central processing units,
• portable automatic data processing devices (such as laptops, tablets etc.),
• video game consoles,
• and further, regardless the taxable amount, to provision of telecommunications services, transfer of emission allowances, or supply of electricity and gas to a trader.

VAT registration

The threshold for mandatory VAT registration for taxable person with registered office, place of business or fixed establishment in the Czech Republic is the turnover of CZK 2,000,000 (approx. EUR 83,330) for a period of 12 previous consecutive calendar months. Voluntary VAT registration is possible as well.

A foreign taxable person that makes long-distance sales (mail order business) in the Czech Republic to any person that is not registered for VAT in the Czech Republic has to register for VAT in the Czech Republic if the total value of the relevant transactions (distanced sale of goods and provision of telecommunication services, radio and television broadcasting services and electronically provided services to a non-taxable person), did not exceed EUR 10,000 (approx. CZK 240,000) in the relevant and the immediately preceding calendar year. Alternatively, a single EU VAT return submitted in the OSS (One-Stop-Shop) scheme will be an option.

Person identified to tax

Taxable person must register as an identified person in the following situations:

• purchase of services from persons established outside the Czech Republic with place of supply in the Czech Republic,
• supply of services with place of supply in another EU Member State,
• intra-community acquisition of goods from another EU-Member State.

VAT group registration

Several taxable persons who have their seat, place of business or fixed establishment within the territory of the Czech Republic and are connected financially, economically, and organizationally, may be deemed as a single taxable person.

Taxes on capital

Net worth tax

There is no net worth tax in the Czech Republic.

Real estate tax

This tax consists of land tax and building and apartment tax. Amount of the real estate tax depends on the purpose of the land, building or apartment and location. The basic rates can be increased by decision of municipality.

Other business-related taxes

Road tax

Levied on road vehicle of category N2 and N3 and their trailers of category O3 or O4, if they are registered in the register of road vehicles in the Czech Republic.

Excise duties

Excise duties are levied on mineral oil, beer, wine, spirits, electricity, coal, natural gas and tobacco products.

Customs duties

Goods imported from non-EU countries are subject to import customs clearance.