In the Czech Republic personal income tax is divided into five independent tax bases:
– income from dependent activity
– income from independent activity (self – emplyoment)
– capital gains
– rent income
– other income
Dependent activity
Activity performed based on labor contracts is subject to payroll tax. The tax base is calculated based on a so-called “super gross” wage. It means that to the gross salary social and health insurance in the amount of 33,8% from the gross salary mandatorily paid by the employer on behalf of the employee is added. This amount (payroll tax base) is taxed by the 15% payroll tax (flat-rate). Payroll tax is withheld from the employee’s gross income by the employer, together with social and health insurance to be paid by the employee 11% in total. It is not possible to reduce the dependent activity tax base for any costs. On the other hand, there are a lot of payments and benefits exempt from payroll tax when provided to the employee. They are for instance travel allowances, meal contributions, recreation, education, contributions to the employee’s pension or life insurance, and many others.
Self employment
Income from activities performed based on the trade license, based on other licenses (attorneys, tax advisers, physicians, etc.), artists, authors, sportsmen, etc. are considered to be income from self-employment. The tax base is generally calculated as a difference between the income and business-related expenditures. When the difference is a loss, it can be offset against other income obtained in the individual tax period with the exception of income from employment.
If actual costs are low or none, a self-employed person may use lump-sum costs. Those costs vary from 40 – 80% based on the type of income:
– 80% from the income from farming or from craftsmanship, up to CZK 1.600.000 annually
– 60% from the income based on the trade license, up to CZK 1.200.000 annually
– 40% from other income, up to CZK 800.000 annually
Capital gains
Income from dividends, interests, bonds, silent partner income, income from foundations among others are considered to be capital gains. The tax base is the income obtained from those titles not reduced (with the exception of income interest income) for any costs.
Rent income
Income from the use of the immovable property or long term income of movable property are considered rental income. This income can be reduced for the actual related costs incurred (mortgage interest, property depreciation, etc.) or 30% flat rate costs up to the amount of CZK 600.000 can be used to reduce the rent income. If the difference is a loss, it can reduce other tax bases in the given tax period the same way as loss incurred from the independent activity.
Other income
Income from the sale of immovable property, stocks, and participation in the companies, liquidation balance, settlement share, and others are considered to be other income. Related costs can be applied but the difference can be zero at maximum, not a loss. But it is possible to offset gains and losses related to the same kind of income (sale of movable, immovable property, stocks, etc.) incurred in the same tax period.
Tax rates
In CZ there is a flat rate of 15% on the income of individuals. However, if the income from employment and self-employment together exceeds CZK 1.672.080 annually in 2020 (CZK 139.340 monthly) the difference is subject to an additional 7% solidarity tax.
The effective tax rate from the employment is 20,1% based on the “super gross salary” calculation, please see above.
Exempt income
Czech income tax act provides a lot of tax exemptions for individuals. Sale of
– the immovable property where the individual had his abode at least 2 years before the sale
– other immovable properties held at least 5 years (from 2020 10 years)
– whatever movable property (cars after one year of ownership)
– shareholding after 5 years of holding, stocks up to CZK 100.000 a year or after three years of holding
– and many others
are personal income tax exempt
Tax credits and allowances
Annual tax credits of CZK 24.840 on a taxpayer or his/her spouse or husband without taxable income, CZK 15.205/19.404/24.204 on the 1st/2nd/3rd child are available. Personal income tax base can be reduced for contributions paid by the taxpayer on his pension or life insurance up to CZK 24.000 annually, donations, etc.
Personal income tax return
It is necessary to file an annual personal income tax return until the 1 April or 1 July when the taxpayer is represented by the tax advisor or has a mandatory audit.
Czech tax residency
Taxpayers are considered to be Czech tax residents if they have their permanent home in CZ or if they have their habitual abode in CZ (meaning they stay in CZ for more than 183 days in the individual calendar year). If those criteria are fulfilled in more states, the taxpayer is considered a tax resident of the state where he or she has his/her center of vital interests (family, pets, non-working activities, membership in clubs, etc.)
Czech tax resident has a so-called worldwide income tax liability, whilst a Czech tax non-resident has his tax liability to the Czech sourced income only (please see the related part in the Corporate income tax section).
Double taxation treaties
Please see section Corporate income tax.
Tax loss
Please see section Corporate income tax.