Consolidation package heading to the Senate
On 13 October 2023, the consolidation package, or print no. 488 of the Chamber of Deputies, passed its third reading in the Chamber of Deputies of Parliament of the Czech Republic and was referred to the Senate for discussion. During the debate on the bill in the Chamber of Deputies, some amendments were also approved. Below, we have summarised the most significant tax changes which, if approved by the Senate, should apply from the next year.
The Accounting Act
- Reporting entities may, subject to specified conditions, keep their accounts in the “functional currency”, which may be, in addition to the Czech crown, the euro, the British pound, or the US dollar.
- The calculation of the net turnover for the purposes of the Accounting Act is modified; this affects, for example, the obligation to have financial statements audited, etc.
- Further, new obligations for reporting entities in sustainability reporting and income tax reporting are defined following the mandatory transposition of European directives.
- The changes to the Accounting Act will be followed by an amendment to Decree No. 500/2002 Coll., which implements certain provisions of the Accounting Act for reporting entities that are businesses maintaining double-entry accounting records.
Corporate income tax and joint provisions of the Income Tax Act
- The corporate income tax will increase from 19% to 21%, and the increase will apply to all tax periods beginning after the Act becomes effective, presumably from 1 January 2024.
- In the period from 1 January 2024 to 31 December 2028, extraordinary depreciation will only be applied to “emission-free” vehicles (e.g. electric vehicles), and existing assets depreciated under this regime will continue to be depreciated under the current rules.
- The maximum possible tax deductible value of a passenger vehicle will be limited to CZK 2 million. This limit will apply only to M1 vehicles acquired in periods starting after the Act becomes effective.
- In periods beginning after the amendment takes effect, it will no longer be possible to provide non-sparkling wine as a tax-deductible advertising or promotional item up to CZK 500.
- In the notification of income paid abroad, the scope of reported income exempt or not subject to taxation in the Czech Republic is narrowed, and only licence fees and profit shares will newly be reported, regardless of their amount. Moreover, interest will also be reported, but only if it exceeds CZK 300 thousand per month. The new regime applies to income generated after 1 January 2024 with an option to apply it also for 2023. Income which is subject to withholding tax will be reported under the same conditions as before.
- An option not to tax unrealised exchange rate differences linked to a notification to the tax administrator should be in effect from 1 January 2024.
- Adjustments are proposed to the exchange rates used in the tax base, namely in connection with the introduction of the “functional currency” in accounting and the related tax calculation in Czech crowns.
Personal income tax
- The threshold for applying 23% personal income tax rate will be reduced from 48 times the average salary to 36 times the average salary in 2024.
- A limit on the exemption of income from the sale of a security or a share in a company when the time test of 3 years or 5 years between the acquisition and sale is met will be introduced in the amount of CZK 40 million per taxpayer. The new regulation will apply to income received from 2025 onwards, and a special adjustment for the acquisition price will be applicable to securities and shares acquired before the end of 2024.
- Other proposed changes that would apply to individuals in 2024:
– application of a relief for a spouse only in the case of care for a child under 3 years of age;
– abolition of a relief for placing a child in a pre-school facility and the abolition of a student tax credit;
– abolition of the possibility to reduce the tax base by contributions paid to a trade union organisation and by payments for examinations verifying results of further education;
– linking the limit for the utilisation of withholding tax on agreements on work done to the employee’s participation in sickness insurance (i.e. abolishing the fixed limit of CZK 10 thousand);
– reduction of a limit for exemption of lottery or raffle winnings from CZK 1 million to CZK 50 thousand;
– state contribution to building savings will newly be considered as other income; and
– introduction of the “general” limit of CZK 50 thousand within which other income of the same type will be exempt.
- For an employee, “traditional” non-cash benefits (i.e. recreation, health and medical services and goods, services of educational and sports facilities, culture and printed books) will be exempted up to the limit of one-half of the average salary per year. Above this limit, they will be considered taxable income and will also be subject to insurance contributions on the part of both the employee and the employer.
- Benefits in kind provided up to this amount will be a non-tax deductible expense, whereas above this limit they may be tax deductible for the employer.
- Meal vouchers or non-cash meals provided at the workplace will have the same tax regime for the employee as the existing cash meal contribution.
- Further, the tax exemption is abolished for gratuitous benefits of employees up to CZK 2 thousand per year and for social assistance to overcome exceptionally difficult circumstances.
- The new regulation will apply from 2024 depending on the type of benefit, either from the date of legal entitlement to the benefit or from the date of its actual provision.
Social security contributions and contributions to state employment policy
- The employee’s contribution rate will increase from 6.5% to 7.1% of the assessment base, i.e. by 0.6% that is newly the rate for sickness insurance.
- The self-employed person’s assessment base for contribution to pension insurance and the contribution to the state employment policy will be at least 55% of the tax base from 2024 (with the possibility of a voluntary increase).
- The minimum assessment base for self-employed persons will also increase from 2024 to 2026, and the increase will be based on the average salary.
- The rate of the self-employed persons participating in sickness insurance will increase from 2.1% to 2.7% from the assessment base.
Value added tax
- A restriction on VAT deduction for the acquisition of M1 passenger cars (except for ambulances and cars operated for the concessionary passenger transport) is introduced. The restriction applies to claims for VAT deduction exceeding CZK 420 thousand. This means that it will not affect the purchase of cars at a price not exceeding CZK 2 million excluding VAT.
- The government proposes to introduce three VAT rates from 2024, namely 0%, 12%, and 21%.
- The zero rate would be applied to books (including e-books).
- A number of items that are currently subject to one of the reduced VAT rates will newly be subject to 12% rate. These will include:
– catering services (excluding most of beverages);
– accommodation services;
– admission to cultural and sporting events, museums, zoo, etc.;
– construction works on family or apartment buildings;
– newspapers and magazines;
– foodstuffs; and
– tap water.
- Conversely, the following items will be included in the standard 21% VAT rate:
– supply of cut flowers or firewood;
– supply of beverages (except selected milk drinks for children);
– hairdressing services, serving beverages in a restaurant except drinking water;
– services of authors and artists, collection, transport, and depositing of municipal waste; and
– repairs of footwear, leather goods and bicycles, or domestic cleaning.
However, the occasional public bus transport of passengers or the supply of single-use medical or diagnostic devices (including repairs) is moved from the standard 21% to the reduced 12% VAT rate.
Real estate tax
- As part of the consolidation package, the government also proposes a relatively substantial increase in the real estate tax, up to 1.8 multiple from 2024.
- Municipalities will remain the sole recipients of real estate tax income.
- At the same time, the government proposes to introduce an inflation coefficient, which would automatically increase the real estate tax by the inflation for the previous period starting from 2025.
Excise duty and energy taxes
- In the field of excise duty, the proposal includes an increase in the tax on cigarettes, smoking tobacco, cigars, and cigarillos by 10% from 2024 and by 5% each year between 2025 through 2027. The tax on heated tobacco is to increase by 15% each year between 2024 through 2027. Chewing and snuff tobacco will be newly taxed, with the tax rate increasing gradually over the next four years.
- A new tax on nicotine sachets and e-cigarette refills is planned as well. Compared to the original proposal, the tax rate will be gradually increased between 2024 through 2027 instead of being introduced once.
- The excise duty on alcohol is to increase by 10% in 2024 and by the same amount in 2025. In 2026, the increase will only be 5%. Compared to the original proposal, the tax rate should therefore increase more rapidly. However, the zero rate will remain on still wine.
- It is also proposed to abolish the exemption from excise duty on aviation fuel for domestic flights.
- The government also plans to abolish the refund on excise duty on mineral oils consumed in mineralogical and metallurgical processes that should align taxation with the rate on oils used for heating purposes of CZK 660/1,000 l.
- Similarly, the government proposed to abolish the tax exemption on natural gas, electricity, and solid fuels in mineralogical and metallurgical processes. Therefore, the rate of CZK 30.60/MWh of combustion heat will newly apply to natural gas, CZK 28.30/MWh to electricity, and CZK 8.50/GJ of combustion heat to solid fuels in the original sample.
- The rate for other games of chance (e.g. fixed-odds betting) is increased from 23% to 30%, while the tax rate for lotteries and technical games remains at 35%. The minimum sub-tax on technical games will now be CZK 13,400 per authorised device.
In addition to the above-stated changes, the plan is to extend the effect of Act No. 128/2022 Coll., on Measures in Taxation Related to the Armed Conflict on the Territory of Ukraine Caused by the Invasion of the Russian Federation Army. In simple terms, the government’s announced extension of the preferential tax treatment of donations to Ukraine for 2023.
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The consolidation package, or print no. 488 of the Chamber of Deputies, is available on the website of the Chamber of Deputies.