Taxes in Czech Republic 2024-2025

The organizational structure of the tax regime of the Czech Republic is targeted in compliance with the principles adopted in most European Union states and embraces a wide range of both direct and indirect tax liabilities. The list of direct taxes includes corporate income tax, personal income tax, property taxes, and road tax. Indirect taxes are represented by value-added tax, excise taxes, and environmental taxes. This is the taxation system established in the year 1993 and has, from that date, been distinguished into three: direct taxes, indirect taxes, and other taxes.

As a consequence of the accession of the Czech Republic to the European Union on 1 May 2004, gradual harmonization began and still continues in the process between the tax system and the EU norms and standards. The Czech Republic also is active in developing international co-operation in the area of tax regulation and has concluded double tax treaties with many countries within as well as outside the European Union. The structure of most of those treaties is based on the principles of the OECD Model Tax Convention.

The Law of the Czech Republic divides taxes into direct and indirect taxes. In the context of the harmonization of the national tax system with European Union law, an important development has taken place since the date of accession into the EU, namely 1 May 2004. Besides that, the Czech Republic has a wide network of bilateral treaties against double taxation; EU member states and third countries are based on OECD standards.

The direct taxes in the Czech Republic include:

• Taxes on income of individuals and legal entities governed by the Income Tax Act;
• Property taxes – under the Property Tax Act and according to the Road Tax Act;
• Transfer taxes – under the Real Estate Acquisition Tax Act.

Indirect taxes represent the following:

• Value-added tax imposed by the VAT Law;
• Excise taxes defined by the Excise Tax Act;
• Customs duties – also under the Customs Duties Act;
• Environmental taxes provided by special legislation of the taxation of energy resources.

This systematization presents a complex and multi-aspect tax approach which corresponds to the international standards and also the needs of the modern economic environment.

In the frame of constant adjustment of tax legislation to the dynamic development of the economy, the Government of the Czech Republic adopted the Act on the Taxation of Energy in 2008. Due to the aspiration to optimize the tax system and to enhance its response to economic challenges at the appropriate level, the legislative modifications occur on a rather regular basis.

In 2015, the total revenues reached the level of CZK 670.216 billion, representing 36.3 per cent of the country’s gross domestic product. The tax quota of the Czech Republic continues to be below the average of the European Union, which implies a relatively moderate tax burden.

The most considerable sources of revenues are the income tax, social security contributions, value added tax, and corporate tax. Compared to OECD countries, social security contributions, corporate income and profits, and value added tax are far more significant contributors to total revenues, while personal income tax revenues are well below the OECD average. Property taxes also produce a relatively smaller revenue share than most other countries, adding to the peculiarities of its tax structure.

These data confirm that some tax instruments are very important for the formation of Czech fiscal policy and reflect features typical of the course of economic development in this country against the background of international trends.

Tax system in the Czech Republic 2024-2025

As per the tax legislation of the Czech Republic, the tax residents of the nation are liable to pay income tax on the basis of worldwide income; whereas tax non-residents of the country are liable to pay taxes only on such income that arises within the nation.

Income tax rates for individuals

The Czech Republic uses a progressive taxation scale for the income of tax residents. To be specific,

• Incomes up to CZK 1,582,812 corresponding to 36 average monthly salaries are taxed at a rate of 15%.
• Income above that limit is taxed at a rate of 23%.

These tax rates also apply to any kind of income, which is not subject to final withholding tax at source in the Czech Republic, such as dividends and bond interest paid by a Czech company, and to certain types of foreign-sourced income that are subjected to tax in a separate tax base.

Separate tax base

A special tax base of 15% is levied on certain kinds of foreign investment income, dividends included, as well as interest on bonds issued by non-resident companies. Individuals are entitled to include such income in this separate tax base subject to a flat tax rate, but tax credits or deductions reducing the taxable base cannot be applied to this category of income.

Thus, the taxpayer has a choice: include foreign capital income either in the world-wide tax base, which is subject to progressive taxation and may be diminished by a tax credit and deduction, or treat it as a source of flat rate taxation at a rate of 15%, for which tax credits and deductions are not available.

Personal income taxes in the Czech Republic 2024-2025

Tax resident in the Czech Republic is a natural person who has a place of residence or carries out a permanent stay in the Czech Republic. A natural person shall be regarded as a resident when he/she spends at least 183 days in the Czech Republic during a calendar year, and records are kept for both continuous and discontinuous stays. The legal entity is resident for tax purposes if the seat or place of actual management is in the Czech Republic. Domicile in the country is excluded, where the above does not take place, or when international treaties state otherwise.

Personal income tax rates

• Up to the average wage multiplied by 48, 15 percent of the income.
• The income excess of that threshold is taxed at a rate of 23%.

Peculiarities of taxation of foreign income

A special rate of 15% is established for income subject to withholding tax. However, in cases when tax residents reside in countries with which the Czech Republic has not concluded international treaties on avoidance of double taxation or exchange of tax information, an increased rate of 35% applies.

It aims to offer equality of taxation in the legal system of the Czech Republic, based on international standards and agreements.

Regulation of tax return filing procedure in the Czech Republic

Regulatory framework

Income tax returns are filed in compliance with the requirements of the Income Tax Act and the Tax Code of the Czech Republic. These Acts also stipulate the due dates for submitting the tax return and the way of submitting it.

Taxpayer’s obligations

Correct completion of a tax return, report or statement of accounts is the prerequisite for the correct calculation of tax liabilities. This allows the taxpayer not only to fulfill his legal obligations but also contribute to the state budget and get a refund in case of overpayment of taxes.

E-filing of tax returns

The Act, therefore requires compulsory electronic filing of a tax return in the following cases amongst others:

If the taxpayer or his representative has a legally established data box,

if a taxpayer is obliged to audit its books of account.

Technical Aspects of Electronic Filing

Electronic filing shall be subject to the following conditions:

• A signature equated to a signature in one’s handwriting under other legislation – confirmation of the identity of an applicant to get access to the email account of the sender;
• the application of an identification method that could be certainly confirmed;
• filing via the field of official tax information may also be possible.

These measures further enhance the prospects of reliability and security against data errors for the risks involved in the filling procedures and safeguarding personal information of taxpayers.

Tax payment and filing procedures in the Czech Republic

These steps will make the employees and employers pay their due amounts of taxes and also make the payment of taxes in the Czech Republic quite transparent and correct.

Paying income tax advances on income tax from independent activities

Determination of tax advances

Self-employed pay tax advances based on the last known tax liability stated in the previous tax return. It has to be underlined that for advance payments calculation all other income and related expenses are excluded from the last tax liability.

Frequency and amount of advances

• Advance payments shall be paid by the taxpayer, who is obliged to pay tax in amount from 30,000 up to 150,000 CZK, in amount of 40 percent of it. Payments shall be made twice a year, namely the first by 15 June and the second by 15 December of the tax period.
• Taxpayers whose tax liability exceeds CZK 150,000 pay advances amounting to 25% of the last known tax liability in four instalments. These are due by 15 March, 15 June, 15 September and 15 December respectively.

Exceptions to the advance payment rules

Furthermore, self-employed individuals for whom the final tax liability for the previous year did not exceed CZK 30,000 are exempt from paying the advance. Also exempt from the advance are heirs after the date of the death of the taxpayer and, moreover, those taxpayers whose tax base is formed mainly from dependent activity income subject to withholding of the tax by the employer.

Single tax for self-employed persons

Conditions for the application of the lumpsum tax

Self-employed persons may opt for a lump-sum tax in case their taxable income from self-employment does not exceed CZK 1,000,000 and their total income from capital, rent and other sources does not exceed CZK 15,000. They need not be VAT payers and need not be involved as participants of general partnerships or limited partnerships.

Amount and frequency of paying lump-sum tax

The lump sum advance is made up of:

• health insurance: CZK 2,393,
• pension insurance: CZK 2,976,
• income tax: CZK 100, to the total amount of CZK 5,469 per month.

These pre-payments are made for the period for which the taxpayer is entitled to pay the lump sum tax. The lump sum pre-payments are payable to the bank account of the local tax administrator.

Particular information for various groups of employees and taxpayers in the Czech Republic

How to Appeal a Tax Assessment

Legislative Regulation: Income Tax Act; Tax Code of the Czech Republic

Appeal: An appeal is filed directly with the inspectorate of taxes that made the decision.

Determination of Competency: Unless otherwise provided by law relating to the procedure in taxation, the tax administrator competent for an appeal shall be determined in accordance with the address of the registered office or residence of the taxpayer.

Corporate Income Tax in the Czech Republic is levied on the income of resident companies and permanent establishments of foreign companies. It also extends to the profit shares of corporate partners in general partnerships and limited partnerships.

Taxation of residents and non-residents

Resident companies: The obligation of paying CIT pertains to all income acquired worldwide.

Non-resident companies: The obligation of paying CIT consists of the income obtained within the Czech Republic only.

Tax rates

Standard rate: 21% for tax periods beginning in 2024. For past periods, the rate was 19%.

Special rate on dividends: 15% tax is imposed on dividends received by Czech tax residents from non-residents, where an exemption is not available.

Investment and pension funds: A 5% rate applies for specific investment funds; pension funds are taxed at 0%.

Tax on windfall gain

The paper introduces a temporary surcharge of 60% on income tax for large banks and companies in the energy sector, for which the taxable excess profits are determined as an increase by 20% of the average income tax base for the years 2018-2021. Respectively, the profit is taxed at an overall rate of 79%, or at 81% in the years 2024 and 2025.

Secondly, these corporate income tax measures go to regulate the financial activities of companies in the Czech Republic from both the local and global standpoints of their operations.

Minimum tax under Pillar 2 in the Czech Republic

The laws of the Czech Republic enacted GloBE rules which cover the following:

1. Basic Rule: Income Inclusion Rule, which will be applicable w.e.f 31st December 2023, whereby income of the multinational groups is defined below the minimum tax level.
2. Undertaxed Payment Rule, applicable from 31 December 2024, would obviate the shifting of the base in countries with low-income tax rates.

Starting from 31 December 2023, the minimum value added tax is domesticated at a base of 15%. Because the tax should be the same for all types of economic players in the country.

Application and conditions of Pillar 2

The second pillar rules will apply to the group of companies that comprise a multinational corporate group with business interests in the Czech Republic. Such rules become operable in case revenues for such group exceed the threshold of EUR 750 million according to the consolidated financial statements prepared for at least two of the last four financial years preceding the financial year in which the reporting obligation arose.

Additional provisions

• CbCR: Transitional Safe Harbour for country-by-country reporting, whereby companies can get some temporary reprieve in reporting requirements for country-by-country reporting as part of the adoption of the new rules.
• UTPR Safe Harbours and QDMTT (Qualified Domestic Minimum Top-up Tax) Safe Harbour: These provide conditions under which double taxation or under-taxation for companies under the Pillar 2 rules could be avoided, with more flexible transitional provisions.

These measures help to support the tax base and form a non-abusive taxation system regarding multinationals, preventing the erosion of the tax base and the flight of profits out of the country.

Czech Republic Tax Residency

In the Czech Republic, the status of tax residency is crucial in defining the extent of taxation:

• Tax residents are taxed on worldwide income.
• Tax non-residents are taxed only on income derived from sources in the Czech Republic.

The criteria for tax residency include:

• Stay in the Czech Republic for at least 183 days in a calendar year.
• Permanent residence or address in the Czech Republic.

Tax obligations for individuals

The tax period for individuals corresponds to the calendar year. The relationship between an employee and an employer includes the following tax and contribution obligations:

For tax residents:

1. Personal income tax:
   • Rates are progressive, 15% and 23%.
   • The 23% rate starts applying to the so-called super-gross income exceeding CZK 1,867,728.
2. Social security contributions:
   • 6.5 percent of an employee’s gross salary constitutes the amount that has to be paid by the employee.
   • This includes a ceiling in the form of the maximum threshold of 48 average salaries or CZK 1,867,728 in 2022.
   • Levied at the rate of 4.5 percent of gross salary without applying the ceiling.

Employer Obligations:

Employers should also take the responsibility for withholding relevant taxes and remittances from employees’ wages. This shall include only withholding income tax but also social and health insurance contributions.

These regulations clearly demarcate responsibility between residents and non-residents regarding taxes, stating the expectations on the part of the employer in respect of tax and social insurance payments in the Czech Republic.

Taxation of foreign employees who are not tax residents of the Czech Republic

Income tax liabilities

Foreign employees who are not tax residents of the Czech Republic but who receive income from Czech sources and are subject to the Czech social security system are liable to pay income tax at the same rates as residents:

• Progressive tax rates of 15% and 23%.

Conditions for filing a tax return

Both non-resident taxpayers and residents are required to submit an annual tax declaration, in cases of:

• Having income from more than one employer.
• Obtaining different types of income which in total exceed the amount of CZK 6,000.

Exceptions from the obligation to file a declaration:

• Income obtained from only one employer, which was subject to tax deduction on a monthly basis.
• Income subject to final withholding tax at source.
• Exempted income.

Dates of payment of income tax

Personal income tax is payable within the same deadlines as for filing a tax return. Generally, the tax return and relevant payments must be made by 1 April of the year following the reporting period.

Social security and health insurance contributions

Foreign employees coming within the scope of the Czech social security and health insurance system are obliged, like tax residents, to pay the respective social security and health insurance contributions. These contributions are deducted by the employer from the employee’s salary and paid to the relevant state funds.

These rules ensure that anybody having income in the Czech Republic, whether resident or not, pays into the state system of taxation and social security.

Tax regulation for business in the Czech Republic

These measures ensure a comprehensive taxation of all aspects of business, both operating activities, income from investments and utilisation of property, taking into account domestic as well as international features of companies in the Czech Republic.

Taxation of dividends and interest in the Czech Republic

Taxation of dividends

1. Standard: Dividends paid by companies that are based in the Czech Republic are charged to tax at a rate of 15%. However, the tax is deductible or can be fully relieved as a result of double tax treaties as well as EU directives. Moreover,
2. EU Parent-Subsidiary Directive:
   • Within the EU: Dividends paid by a Czech resident subsidiary to a parent company in another EU/EEA member state are tax exempt provided the parent company holds at least 10% of the shares of the subsidiary for at least 12 months.
   • From outside of the EU: Dividends are liable to taxation at the 15% tax rate, and may be exempt if certain conditions are satisfied concerning the payment of a similar corporate income tax of minimum 12% or a double tax treaty.

Taxation of interest

Withholding tax rate: Interest payable abroad on foreign loans is taxed at 15%. If an applicable double tax treaty can be considered, the above-mentioned tax rate may be reduced or even exempted.

EU Interest and Royalties Directive: Interest paid between related companies within the EU may, under this directive be exempt from taxation is integrated into Czech law.

Practical application

Companies paying dividends or interest: Need to be very aware of the rules and conditions relevant to each transaction in determining the appropriate rate of taxation that applies and whether any reliefs or exemptions may be available.

Taxpayers receiving dividends or interest: Ensuring that international and national laws are followed regarding timely and correct tax returns and payments.

These measures of taxation consider a proper balance between the levy on foreign-sourced income and the promotion of cross-border business and investment.

Taxation of Intellectual Property Royalties in the Czech Republic

These measures ensure proper taxation of intellectual property income in view of the international character of an enterprise and agreements between states.

CROSS-BORDER CORPORATE TRANSACTIONS – TAX REGULATION IN THE CZECH REPUBLIC

Limitation of Interest Deductibility

Debt-to-equity Ratio:

• Debt-to-equity ratio limits: the maximum debt-to-equity ratio for banks and insurance companies is 6:1; for other companies, it is 4:1. Interest in excess of these limits is not recognized as a tax deduction.
• General limitation on deductibility of interest: The limit is 30% of EBITDA (earning before interest, taxes, depreciation and amortization adjusted for tax positions).
• Applies to interest on debt financing exceeding CZK 80 million per year.

Transfer pricing

The tax authorities are carefully monitoring transfer prices from and to affiliated parties.

Prices must comply with the market conditions (“arms length principle”).

In case of non-compliance, respective adjustments in tax base and penalties may be imposed.

Controlled foreign companies (CFC)

Profits of foreign affiliates could be subject to taxation of the Czech parent company in case such an affiliate is considered a CFC.

A company shall be considered a CFC in case:

• Does not engage in significant business activities
• Derives practically all the income in passive form
• Pays foreign tax, which is below half of the potential tax in the Czech Republic

Tax domicile

The companies which are controlled from the Czech Republic or have a place of actual management in the Czech Republic will be regarded as tax domiciles and are liable to pay tax on worldwide income.

Royalty payments

Interest and royalties which refer to payments for the use of IP paid abroad are usually subject to withholding tax at a 15% rate, which may be reduced or eliminated under international treaties.

Recommendations for companies

Plan capital and financing structure carefully to meet tax requirements with minimum liability.

Transfer prices need periodic review along with maintenance of relevant documentation justifying prices in related transactions.

Regarding foreign transactions, taking into consideration EU directives and bilateral tax treaties, there is a possibility to avoid double taxation and minimize tax risks.

Czech Republic International Trade Tax and Customs