Overview of Tax Law Changes in the Czech Republic for 2024

As of March 2024, the Czech Republic is facing significant changes in its tax legislation, which came into effect at the beginning of the current year. These changes cover a wide range of areas, including corporate and personal taxation, as well as the social security system. In light of these changes, organizations and individuals must carefully adapt to the new rules to comply with tax obligations and avoid potential penalties. In this article, we will provide an overview of the key changes in the tax legislation of the Czech Republic for 2024 and discuss their impact on businesses and private citizens.

Accounting Act Amendments

• Introduction of Functional Currency Option: Reporting entities now have the flexibility to maintain their accounts in a “functional currency,” expanding beyond the Czech crown to include the euro, British pound, and US dollar.
• Revised Calculation of Net Turnover: Alterations in the calculation of net turnover impact various obligations such as financial statement audits, necessitating adjustments in compliance practices.
• Enhanced Obligations in Sustainability and Income Tax Reporting: In line with mandatory transposition of European directives, reporting entities face new obligations in sustainability reporting and income tax declaration.

Corporate Income Tax and Common Provisions Overhaul

• Corporate Income Tax Rate Adjustment: A notable increase in the corporate income tax rate from 19% to 21% is implemented, effective for taxable periods beginning January 1, 2024, aiming at fiscal recalibration.
• Focused Depreciation for Emission-Free Vehicles: Over the period spanning 2024 to 2028, extraordinary depreciation provisions are targeted solely at emission-free vehicles, with existing asset depreciation transitioning to prevailing norms thereafter.
• Restriction on Tax-Deductible Value of Passenger Cars: A maximum tax-deductible value for passenger cars is instituted, capped at CZK 2 million for M1 vehicles procured post-January 1, 2024, aligning with environmental and fiscal considerations.
• Revamped Tax-Deductible Advertising Provisions: Provisions regarding tax-deductible advertising items undergo modification, with still wine no longer qualifying for tax deductions up to CZK 500, fostering revised marketing expenditure strategies.
• Refined Scope of Income Reporting Abroad: Amendments narrow the scope of income exempt from Czech Republic taxation upon international reporting, now encompassing only royalties, profit shares, and interest exceeding CZK 300 thousand per month, effective January 1, 2024.

Personal Income Tax Reforms

• Adjusted Threshold for 23% Personal Income Tax Rate: The threshold for application of the 23% personal income tax rate undergoes reduction, reflecting economic dynamics and income distribution considerations.
• Revised Exemption Limit on Security Sales Income: A cap on exemption for income derived from security or share sales is introduced, subject to meeting specific time criteria, with a cap of CZK 40,000,000 per taxpayer for income from 2025 onwards, fostering equitable tax treatment.

Additional Individual Taxation Adjustments for 2024

• Dependent Spouse Tax Credit Realignment: Eligibility for the dependent spouse tax credit is revised to apply exclusively when caring for children under 3 years old, acknowledging caregiving responsibilities.
• Abolition of Various Tax Credits: The elimination of tax credits for placing a child in a pre-school institution, student tax credit, and reduction of tax base through trade union contributions and educational examination payments signify a shift in tax policy priorities.
• Refined Withholding Tax Application: The linkage of withholding tax for work performance agreements (DPP) to employee participation in sickness insurance heralds a nuanced approach to tax administration.
• Reduction in Lottery Winnings Exemption Limit: The reduction in the exemption limit for lottery or raffle winnings from CZK 1,000,000 to CZK 50,000 underscores recalibrated tax relief measures.
• Consideration of State Housing Savings Scheme Contribution as Other Income: The inclusion of state contributions to housing savings schemes as other income reflects holistic income assessment frameworks.
• Introduction of “General” Other Income Exemption Limit: The introduction of a “general” CZK 50,000 exemption limit for other income signifies a standardized approach to income tax treatment.

Employee Benefits Overhaul

Taxable Limits and Unified Meal Allowances

For the year 2024, non-monetary benefits provided to employees, such as recreational activities, healthcare services, and cultural events, are exempt from taxation up to half of the average wage, which amounts to CZK 21,983.5. However, any benefits exceeding this limit will become taxable and will require insurance contributions from both the employee and the employer. Non-monetary benefits within this limit are not tax-deductible for the employer, but those surpassing it may be tax-deductible. Additionally, the amendment streamlines the treatment of all types of meal allowances, whether they are in the form of vouchers, on-site meals, or cash allowances.

Changes in Gift and Social Assistance Tax Exemptions

Effective from January 1, 2024, tax exemptions for gifts up to CZK 2,000 per year and for social assistance to alleviate exceptional circumstances for employees are abolished. These alterations apply universally, irrespective of the employer’s taxable period. Detailed guidelines regarding employee benefits are available on the Financial Administration’s website.

Adjustments in Social Security Contributions

Increment in Employee Contribution and Self-Employed Assessment Base

In 2024, the employee’s contribution to social security will rise from 6.5% to 7.1% of the assessment base, marking a 0.6% increase, which corresponds to the new sickness insurance rate. For self-employed individuals, the assessment base for pension insurance contribution and state employment policy contribution will be set at a minimum of 55% of the taxable base from 2024 onwards, with the option for voluntary augmentation. Moreover, the minimum assessment base for the self-employed will undergo gradual annual increments until 2026, based on the average wage. The contribution for self-employed individuals participating in sickness insurance will escalate from 2.1% to 2.7% of the assessment base.

Revisions in Value Added Tax (VAT)

Introduction of VAT Deduction Limit and Adjusted Tax Rates

A limitation is imposed on the VAT deduction for the purchase of M1 cars, capping it at CZK 420,000. This limitation does not affect cars priced below CZK 2 million exclusive of VAT. From 2024, three VAT rates are in effect: 0%, 12%, and 21%. Notably, books, including e-books, enjoy a zero-tax rate. Several items previously subject to reduced VAT rates now face a 12% tax rate. Conversely, certain items, such as cut flowers, beverages, hairdressing services, and repair services, will be reclassified to the standard 21% VAT rate. However, occasional public bus transport and disposable medical devices will now be taxed at the reduced 12% rate.

Changes in Real Estate Tax and Excise Taxes

Adjustments in Real Estate Tax and Introduction of New Excise Taxes

Real estate tax rates will increase from 2024, some by as much as 1.8 times, and an inflation coefficient will be introduced to automatically adjust the tax based on the previous period’s inflation rate from 2025 onwards. The consolidation package includes substantial changes that may necessitate tax return filings for many. Excise taxes see an increase in rates for tobacco products, heated tobacco, and alcohol, along with the introduction of new taxes on nicotine sachets and e-cigarette refills.

Gambling Tax Modifications

Changes in Tax Rates for Various Games of Chance

The tax rate for certain games of chance, such as fixed-odds betting, will increase from 23% to 30%, while the tax rate for lotteries and technical games remains at 35%. Additionally, the minimum sub-tax on technical games will now be CZK 13,400 per authorized device.

Conclusion

The Income Taxes Act undergoes further amendments, primarily linked to adjustments in the law concerning financial market development. Published on December 29, 2023, in the Collection of Laws under No 462/2023 Coll., this law took effect on January 1, 2024. Previous articles have detailed these changes, and we provide a link to selected issues here.

Taxation of Employee Stock Option Plans (ESOP)

A prominent aspect of this amendment is the taxation of employee stock option plans (ESOP). Essentially, the tax treatment of ESOP remains largely unchanged, except for a deferral of income taxation to a future date. Detailed insights on this matter can be found in our article titled “ESOP: New Rules for the Taxation of Employee Stock and Options to Purchase Stock in a Business Corporation.” Additionally, questions arise regarding social security and health insurance premiums on such employee income, which we address in our blog post “ESOP: Uncertainties regarding social security and health insurance premiums.”

Modification in Research and Development Deduction

The amendment also alters the research and development deduction, particularly in terms of the taxpayer’s burden of proof. In cases where doubts arise for the tax administrator, the content of project documentation can now be verified through alternative means of evidence. This provision applies to tax proceedings initiated from the enactment of the amendment, starting from the beginning of 2024. For a comprehensive analysis, refer to our article titled “Are better times ahead for R&D deduction checks?”

Introduction of Retirement Savings Schemes

An extensive change is the establishment of a new support system for retirement savings schemes, encompassing additional pension insurance with state contributions, supplementary pension savings, pension insurance with institutions, private life insurance, and long-term investment products for employees. Furthermore, tax support is extended to long-term care insurance, which covers situations where policyholders or their dependents require assistance. Detailed coverage of this topic is available in our article titled “Long-term investment product: A new option for saving for retirement.”

Additional Legislative Changes

The onset of 2024 brings forth a plethora of updates in tax-related matters. Apart from the aforementioned, Act No 416/2023 Coll., concerning top-up taxes for large multinational groups and large domestic groups (referred to as Pillar II), has also taken effect. Moreover, amendments to Act No 426/2023 Coll., relating to investment incentives, have come into force, further shaping the tax landscape.

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