ESOP and insurance premiums

As we have previously informed you, an amendment to the ITA effective as of 1 January 2024 introduced a regime deferring the time of taxation of non-monetary income from the acquisition of shares in a business corporation by an employee at a discounted price or for free until the first of the times of deferred taxation defined in the Act (e.g. sale of shares, employee leaving the company or expiry of 10 years from the acquisition of shares) occurs. However, the regulations governing the assessment bases for social security and health insurance contributions were not amended at the same time.

The amendment currently under consideration, which should be in force from 1 July 2024, should unify these dates again, and if the taxation of the relevant income has been postponed, the date at which the mandatory insurance contributions are due will also be postponed. If there is a reduction in taxable income in the event of a decrease in the value of the relevant shares between the time of acquisition and the time of deferred taxation in accordance with the ITA, the mandatory insurance contributions may also be deducted from that calculated amount of income.

Unfortunately, the current wording of the amendment does not contain any transitional provision that would ensure the retroactive effect of these changes from 1 January 2024, and therefore, until the amendment comes into effect, mandatory insurance premium should be paid in the case of such income.

At the same time, we would like to bring to your attention that we have noted the preparation of other draft amendments of the ITA that could modify the taxation regime for ESOP income in the future. However, these have not yet entered the legislative process. One of the proposals, presented by the Pirate Party, could allow for a change in the way, a portion of ESOP income is taxed, i.e., a change in the income classification from employment income to other income (without being subject to mandatory insurance contributions but also without the possibility of exempting the related capital gain from taxation). Another proposal would make the current regime optional. We will continue to monitor this topic and will inform you as soon as any of the proposals emerge in the legislative process.

Additional adjustments to the regime for agreements to complete a job (DPP)

From 1 July 2024, all employers will have to report all agreements to complete a job based on which they employ their staff (irrespective of their income) to the ČSSZ (the Czech Social Security Authority) via a statutory summary form.

Further changes to the DPP regime will only be in force as of 1 January 2025. In particular, they include the introduction of the ‘notified agreement’ scheme, whereby the income received under this DPP will only be subject to compulsory contributions if the monthly income is at least 25% of the average wage. Income from the DPP with other employers will be subject to mandatory insurance contributions if the monthly income reaches at least CZK 4,000. At the same time, the withholding tax limit will be aligned with the mandatory insurance contribution limits.

Other interesting changes to the Income Taxes Act

While previously employees were to be taxed on the regular price in the case of a non-monetary benefit of using a preschool, the above-mentioned amendment would now tax the arm’s length price for a state-run preschool (the current monthly amount is up to CZK 1,512), and not only in the case of a benefit provided within a company preschool, but also in the case of other preschools. This change should apply retroactively from 1 January 2024.

Lunches for former employees on retirement or disability pensions should be exempt from income tax under this amendment up to 70% of the upper limit of the meal allowance that can be provided to employees remunerated by salary for a business trip lasting between 5 and 12 hours, i.e. CZK 116.20 for 2024. This change should also apply retroactively from 1 January 2024.

For the exemption of income from the sale of immovable property contingent upon the use of the proceeds to procure their own housing needs, the conditions are eased, and it will now be possible to apply the exemption again even if there is no timely notification to the tax office, provided that all other conditions are met. This amendment will also apply retroactively from 1 January 2024.

Parliamentary Document No. 570 is available on the website of the Chamber of Deputies.