Participants in the long-term investment product can claim a tax deduction of up to CZK 48,000 for their deposits. The Act also allows tax exemption of employer contributions up to an annual amount of CZK 50,000. However, this annual limit will apply to all retirement savings products, including existing ones, such as supplementary pension schemes with a state contribution, supplementary pension savings or private life insurance.

Eligibility for the deduction will have to be demonstrated by means of the long-term investment product contract and a certificate of the participant’s contribution issued by the company providing the product.

In order to maintain the tax support, the distribution of the funds from the LTIP must occur more than 10 years after the product is set up, but no earlier than the calendar year in which the taxpayer reaches age 60.

The Act also provides for other situations, such as the termination of the product. In the event that the product is terminated by the provider (e.g. by bankruptcy of the company), the tax support can be maintained, but only if the funds paid out are reinvested in another LTIP within one month.

If the conditions are not met, the tax deduction taken in the last 10 years prior to the payment will have to be taxed as other income pursuant to Section 10 of the Income Tax Act. At the same time, any employer contributions will have to be taxed as employment income pursuant to Section 6 of the Income Tax Act. Again, the tax treatment applies only to contributions made in the last 10 years prior to the payment, but please note that if the employer contributions are taxed, the tax return is automatically obligatory.

In addition to tax support, the LTIP also brings flexibility on the type of investments. Within the scope of the specific LTIP provider’s offer, the participant can select whether to invest their investment in, for example, shares of publicly traded companies, money market instruments, ETFs or unit trusts.

Under the LTIP, it is possible to trade and generate capital income in the individual titles while maintaining the tax benefits associated with the investment of the funds. However, it is important to note that such income and transactions will be subject to standard taxation.

We assume that this fact will complicate investing through the LTIP. For example, there may be a situation where a participant realises a gain on the sale of a security that will not be tax-exempt. The participant will be required to tax that income, but will not be able to use the funds associated with the sale for that purpose, as extracting those funds from the LTIP would result in the loss of the tax benefit.

Even in the case of a passive investment, there is a risk in the longer term that the participant may incur a liability to file a tax return in relation to the capital gains held in the LTIP. This is particularly the case if the participant invests in instruments whose capital income is not subject to withholding tax in the Czech Republic (e.g. dividend shares of foreign companies). If, for example, the gross annual amount of such foreign dividends exceeded CZK 20,000, the participant would no longer be able to request an annual reconciliation from the employer and would be obliged to file a tax return due to the existence of such dividend income.

The option to provide for retirement through a LTIP is certainly a welcome alternative to existing products. However, participants should give due consideration to the selection of individual investments and bear in mind, as part of their investment strategy, that even without early withdrawal of funds, there may be situations where individual transactions made under the LTIP will affect their tax position.