Income Taxes Act Outlook through 2021 – Significant Changes Considered in Individual Taxation

Parliamentary Press No. 572 updating, inter alia, Act no. 586/1992 Coll., on Income Taxes (the “ITA”) has not passed the legislation process yet and another amendment for 2021 is already being discussed. According to the statement of the Ministry of Finance of the Czech Republic, the changes under preparation should be based on a long-term plan of the Government of the Czech Republic under which the ITA should be simplified and rid of a large number of exceptions it contains. And frankly speaking, the state budget has to be funded as well. Debates on this topic clearly indicate that the amendment should include mainly changes in individual taxation and some of them are to be fundamental.

Sale of real estate

One of the discussed topics is restriction of tax exemption applied to the sale of real estate that is not the seller’s residence. In other words, the restriction would relate to so called investment property the sale of which has been taxed under Section 4 (1) (b) of the ITA to date. The term of possession required to apply the sale exemption should be extended from 5 to 15 years. The time test and other conditions regulating sales of real estate that was the seller’s residence (i.e. Section 4 (1) (a) of the ITA) are expected to remain unchanged. In this context, it is interesting to mention a related transitional provision that should stipulate a stricter time test for exemption of property acquired after the effective date of the amendment. Property acquired before the effective date thus would have been treated subject to existing regulations.

Exemption of income generated from bonds issued abroad

Next change possible is the cancellation of interest income exemption for individuals, tax non-residents, generating interest income from bonds issued abroad by taxpayers residing in the Czech Republic (the ‘Eurobonds’). Newly, Czech firms in the position of payers could withhold tax to these individuals. We would like to point out in this context that in general, this type of income is subject to the reporting obligation pursuant to Section 38da of the ITA, which will hopefully be less strict in the amendment as promised earlier.

Meal contribution   

The amendment should contain the long-awaited and discussed change in the provision of meal contributions by employers. Newly, tax relief should apply to the provision of cash contributions in addition to the existing non-cash allowance (meal vouchers). The cash meal allowance per shift could be exempt for employees in the amount of up to 70% of the upper limit of per diem allowance in case of a business trip of 5-12 hours (which may be about CZK 71 in 2020). Employee cash contributions above this limit would be taxed as employment income. On the part of employers, this should be a tax-deductible expense with no limit.

Cancellation of Financial Investment Exemption

The most fundamental change for investors is the debated cancellation of income tax exemption relating to the sale of securities and income from the sale of shares in business corporations, i.e. for example in a limited liability company. Income from the sale of shares in a corporation has been exempt after five years of ownership while income from the sale of securities is exempt after three years. According to the latest unofficial information, however, the Ministry of Finance of the Czech Republic has withdrawn this proposal and the amendment will not be proposed.

The question is in what form the amendment will be proposed and, predominantly, with what wording it will be approved. However, we can definitely expect the “shortening era” as the famous Czech author Bohumil Hrabal might have called the plans of the Ministry of Finance of the Czech Republic.

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