Czech Republic: taxation

Tax issues

The current tax system was introduced in January 1993, but significantly amended in January 2008. The Czech tax system today comprises:

•  Value added tax (VAT)
•  Excise taxes
•  Corporate and personal income tax
•  Road tax
•  Real estate tax
•  Inheritance, gift and real estate transfer tax

Value added tax

All entrepreneurs whose turnover exceeds CZK 1,000,000 in any subsequent 12-month period must register as a VAT payer with the financial authorities. Also other situations of obligatory registration duty exist. However, an entrepreneur can apply for registration as a VAT payer also voluntarily. The taxation period is either one month or a quarter.

There are two VAT rates, the basic tax rate is 19% and the reduced tax rate is 9%. The basic tax rate is levied on goods, services and transmission of real estate. The reduced tax rate applies for selected goods (including specific agricultural produce, essential foodstuffs, books, etc.) and selected services (e.g. public transport, air and waterway transport, health care services). There are also certain types of services that are rendered without VAT (education, basic health care services, post service, insurance activities, etc.).

Goods exported from the Czech Republic outside EU are tax exempt and services rendered abroad are not taxable in the Czech Republic. The Czech VAT system has been fully harmonized with EU 6th VAT Directive no 77/388.

The VAT payer has the right to have the exceeding input tax refunded.

Foreign persons/entities making taxable supplies in the Czech Republic are subject to VAT generally in the same way as Czech persons/entities.

Corporate Income Tax

Corporate Income Tax is levied on all income of Czech legal entities and on Czech-source income of foreign legal entities. It applies irrespective of whether the enterprise is subject to Czech or foreign ownership and is payable on the basis of profits reported in the enterprise's financial statements (as adjusted for certain deductible and non-deductible items). A branch or a permanent establishment of a foreign company is generally subject to tax on the same basis as a company. There is not tax consolidation in the Czech Republic. Companies having their seat (or the place where they are managed from) in the Czech Republic are subject to Czech tax on worldwide income.

No distinction is made between ordinary income and capital gains for these purposes. The standard rate of corporate tax has been consistently reduced since 1992 and for 2008 it is 21% (for 2009 it is planned to be 20% and for 2010 19%).

Losses incurred during a taxation period (usually corresponding to an accounting period, generally one calendar year) can be carried forward for a period of 5 years.

Social security contributions (health and social insurance) are based on employees’ gross salary earnings. The employer’s payable share is 35% and the employee’s share is 12.5% of the base.

Certain types of income are subject to withholding taxes (different rates apply - 15% (from 2009 12.5%) on royalties, 15 % (from 2009 12.5%) on dividends and interests from bonds).

Personal Income Tax

Czech residents are subject to income tax on their total gross income including the social security contributions paid by the employer and by the employee (so called super-gross income), while non-residents pay income tax on Czech-source income only. Individuals having a permanent home in the Czech Republic and/or residing in the Czech Republic for at least 183 days within a calendar year are regarded as residents for this purpose. All categories of taxable income (including income from employment and private business, rental income and certain capital gains) are aggregated and taxed at 15% (from 2009 at 12.5%) of the super-gross income, i.e. 22.125% (from 2009 18.4375%) from the gross income excluding the social security contributions. Personal allowances of CZK 28,840 (from 2009 CZK 16,560) per year will apply. Employees usually are subject to health insurance and social security contributions, which are based on the gross income and equal to 12.5 % of the gross income.