The Czech government has published a draft of the so-called consolidation package, which includes relatively substantial changes to certain provisions of tax laws with effect from 1 January 2024. The draft law is at the beginning of the legislative process and its final form is therefore not yet known. Below is an overview of the most important proposed changes.
For the current text of the amendment to the laws relating to the consolidation package, see here.
Corporate income tax:
The corporate tax rate will increase from the current 19% to 21%. The increase in the tax rate will apply to all tax years after 1 January 2024.
- From 2024, it will not be possible to include in tax deductible expenses "silent wine" provided as an advertising or promotional item up to CZK 500.
- From 2024, the maximum tax deductible amount for the acquisition of a passenger car (M1 category) will be limited to CZK 2 million.
- In the period from 1 January 2024 to 31 December 2028, exceptional depreciation will only apply to electric cars. Assets depreciated under this scheme will be depreciated according to the existing rules.
- Of all income exempt or not subject to taxation in the Czech Republic, only royalties and profit shares (regardless of their amount) will be reported in the Notification of Income Paid Abroad. However, the new regulation will apply only to income for which the obligation to withhold tax would arise after the amendment comes into force. Income subject to withholding tax will be reported under the same conditions as before.
Authors: Michal Větrovec, Adéla Pohůnková
Personal income tax and social security contributions:
Personal income tax rates:
- The personal income tax rates in the Czech Republic are 15% and 23%. The higher tax rate applies if the aggregate tax base exceeds a certain threshold. The current threshold is 48 times the average wage (CZK 1 935 552 for 2023). From 2024, the threshold should be reduced to 36 times the average wage.
Limiting or abolishing tax exemptions and tax credits:
- Income from the sale of shares in a business corporation is exempt from tax if certain conditions are met, in particular the time test for holding the share in question (3 years for securities, 5 years for other shares in a business corporation). Starting in 2024, another criterion for exemption will be an aggregate limit of CZK 40,000,000 as the maximum amount for exemption of income from the sale of securities and other shares in a business corporation for the taxable year. If the sale proceeds exceed this limit, the remainder of the proceeds will be subject to tax, and the market value of the business interest as determined under the Valuation Act as of December 31, 2023 may be used as an expense against taxable income.
- A wide range of non-cash employee benefits ("cafeteria", i.e. employer contributions for cultural and sporting activities, recreation, use of medical facilities or purchase of goods from medical facilities, purchase of books, etc.) are currently exempt from tax. As of 2024, this exemption is to be abolished, but on the other hand, the related expenses for the company may be treated as tax deductible costs for the employer under certain conditions.
- Currently, an employer can provide its employees with tax-free meals and non-cash meal allowances without a ceiling. From 2024, an upper limit for exemption per shift worked is to be introduced.
- In order to simplify the system for the exemption of small income (income from the state contribution to building savings, exchange gains on money exchanges, income from bee-keeping, income from occasional activities, gifts from a single donor), an aggregate exemption limit of CZK 50 000 per tax year is to be introduced, which should apply to each type of other income.
- Currently, a taxpayer can claim a tax credit for a spouse with an annual income of less than CZK 68,000 if the spouses live in the same household. Under the new legislation, the tax credit will only apply to taxpayers living in a joint household with a child under 3 years of age.
- The child placement tax credit is to be abolished.
- The student tax credit is to be abolished.
Social security system:
- Employees' social security contributions are to increase by 0.6% (up from a maximum contribution percentage of 11% to 11.6% of gross wages). Employees will contribute this additional payment to the sickness insurance scheme.
- Agreements for the performance of work under the Labour Code are exempted from the contribution (up to CZK 10 000 per month). In connection with the draft law, new upper thresholds for exemption from the insurance contribution system will be introduced so that all agreements concluded with more than one employer will be cumulated when testing these thresholds. To this end, a new employer notification and employee information obligation is to be introduced.
- Social security contributions for the self-employed will increase by raising the assessment base. The increase should apply to self-employed persons who are subject to the minimum assessment base (an increase of 5% of the average wage per year over the next 3 years), and for self-employed persons whose income is subject to more than the minimum assessment base, the assessment base should increase from the current 50% of the tax base to 55% from 2024.
Author: Monika Lodrová
Value added tax:
In connection with the limitation of the deductibility of the amount for the purchase of cars from the perspective of income tax, it is also proposed to limit the application of VAT deduction. In the case of the purchase of passenger cars, it will be possible to apply a deduction of a maximum of CZK 420,000. This is the amount of VAT attributable to the purchase of a car of CZK 2 000 000 excluding VAT.
Currently, the Czech VAT system applies three rates, a standard rate of 21% and two reduced rates of 15% and 10%. With effect from 2024, the government proposes to merge the two reduced rates into a new single reduced rate of 12%. The standard VAT rate will remain unchanged at 21%. A new zero VAT rate will also be introduced, which will apply only to books, including e-books. This will lead to the reclassification of some goods and services to a different rate.
For example, the new rate of 12% will apply to the following goods and services:
- food
- accommodation and catering services
- water and sewerage charges
- heat
- medicines
- gluten-free products
- medical devices
- magazines
- buildings for housing
- baby car seats
- funeral services
- Conversely, several items currently subject to 10% or 15% VAT will be reclassified as supplies subject to the standard rate:
- hairdressing services,
- beverages, including draught beer,
- services of authors and artists,
- collection, transport and disposal of municipal waste,
- repair of footwear, leather goods and bicycles,
- household cleaning,
- firewood,
- newspapers
Other changes:
Property tax:
- Another part of the proposed package is a fairly significant increase in property tax, up to double from 2024.
- At the same time, the budget designation would be changed, with a portion of the tax becoming revenue for the state budget.
- It is also proposed to introduce an inflation coefficient, which would automatically increase the property tax by inflation for the previous period from 2025.
Excise and energy taxes:
- Regarding excise taxes, the proposal includes a 10% increase in the tax on cigarettes, smoking tobacco, cigars and cigarillos from 2024 and 5% each year from 2025 to 2027. Among other things, the proposal also includes a 15% increase in the tax on heated tobacco each year from 2024 to 2027.
- There are also plans to introduce a new tax on nicotine sachets and e-cigarette refills, which have not yet been taxed.
- As regards excise duty on alcohol, it is expected to increase by 10% in 2024 and by 5% in each of the years 2025 to 2027.
- In contrast, the zero rate will be maintained for 'still wine'.
- The proposal also includes an increase in the excise duty on diesel to its pre-war level in Ukraine - an increase of CZK 1.50 per litre.
- It is also proposed to abolish the excise duty exemption on aviation fuel for domestic flights.
- The government also plans to abolish the refund of excise tax on mineral oils consumed in mineralogical and metallurgical processes and to abolish the tax exemption on natural gas, electricity and solid fuels in these processes.
In addition, the preferential tax regime for donations to Ukraine will be extended to 2023.
Author: Petr Linx
Introduction of an exemption limit on income from the sale of securities or other interests in a business corporation
As part of the legislative text of the consolidation package, which should be effective as of 1 January 2024, legislators are proposing measures that will significantly affect the taxation of income from the sale of securities or other interests in a business corporation from the property of individuals:
- Beginning in 2024, they propose to introduce an upper limit on the exemption of income from the sale of securities or other interests in a business corporation. Currently, if the conditions are met, in particular the time test for holding the share in question (3 years for securities, 5 years for other shares in a business corporation), the income is fully exempt.
- Newly, such income will be exempt only up to CZK 40,000,000 per year after meeting the time test. This limit is the aggregate limit for exempt income from the sale of securities and other interests in a business corporation for the taxable year.
- In a situation where income from the sale of an interest in a business corporation can only be partially exempted due to exceeding the limit on exempt income, the market value of the interest as determined under the Valuation Act as at 31 December 2023 can be used as an expense against taxable income. This will essentially ensure that the increase in the value of the interest from 2024 onwards will be taxed.
Of course, it remains to be seen what version of the final package will be approved.
Authors: Štěpánka Kopecká, Zenon Folwarczny