Consolidation package I: Overview of main changes in taxation

Corporate income tax
 
Tax rate increase

For corporations, the most significant change will be a two-percentage point increase in the standard income tax rate from 19% to 21%. With this change, the government expects an annual increase in the state budget of CZK 22 billion by 2025.

Limitation of tax deductibility of selected costs

Regarding the deductibility of tax costs, the coalition proposes to:

• introduce a CZK 2 million limit for determining the input price of passenger cars for business purposes (i.e., any depreciation on the input price above CZK 2 million would be tax ineffective). For finance leases, the limitation will be applied to lessees by restricting the tax deductibility of lease payments, both in aggregate and for a single tax year.
• abolish the tax deductibility of non-sparkling wine as a gift up to CZK 500
• abolish the tax deduction of payments for examinations verifying the results of further education
• do away with the limitation on the deductibility of employee meal expenses and the tax non-deductibility of meal vouchers in excess of the statutory limit
• introduce the extraordinary depreciation for electric cars purchased between 1 January 2024 and 31 December 2028
• abolish the tax non-recognition of expenses for certain employee benefits provided as non-monetary benefits (e.g., contributions to cultural events, trips, sporting events, etc.) for which the amendment will abolish their exemption on the part of employees, including such benefits provided to their family members
• eliminate the tax non-recognition for expenses exceeding income in facilities meeting the needs of employees. 

The tax deductibility of expenditures on the above benefits would become conditional on the right to the benefit being stated in the collective or employment agreement or in the employer's internal regulations.

 
Tax on gambling

The second tax rate for selected gambling operators is to be increased from the current 23% to 30%.

Real estate tax

The coalition proposes the introduction of a state part of the real estate tax, which should correspond to the amount of the current tax before the application of the local coefficient. The tax would thus newly consist of a part that would be revenue of the state budget (state tax) and a part that would continue to be revenue of the municipal budget (local tax). Municipalities would retain the power to influence the collection of their part of the tax by applying a local coefficient to the local tax. The coefficient would be adjustable from 0.5 to 5 (currently 1.1 to 5). In cases where the municipality has not applied and will not continue to apply the local coefficient, the amendment will effectively double the tax liability.

As most rates have not changed since 2010, it is also planned to introduce automatic indexation of the tax liability by applying an inflation coefficient. This is proposed to be 1 for 2024 and will then be based on the evolution of the consumer price index. 

These measures should bring approximately CZK 9 billion to the state budget in the first year of the amendment's effectiveness. The amendment will be applicable for the calculation of the real estate tax for 2024 if the amendment comes into force by 1 January 2024 (the real estate tax is assessed based on facts as at the first day of the calendar year). 

The amendment also includes a comprehensive modification of the coefficients by which municipalities can influence the proceeds from this tax and several other partial changes, e.g., in the definition of individual immovable property for tax purposes and the scope and exemption of land and buildings, which can significantly affect tax liabilities.

Value added tax

As part of the simplification of the VAT system, a major reform of VAT rates has been proposed: by merging the two current reduced VAT rates into one of 12%, we should soon have "only" two VAT rates of 12% and 21%. This should result in a lower tax burden on basic goods such as food, housing and medical products. The government expects savings of CZK 6.3 billion for citizens in this area. The term 'affordable' housing has been newly proposed for social housing and shall remain at the reduced (now 12%) VAT rate.

At the same time, the government proposes to completely exempt the supply of books, both printed and electronic, from VAT. In this context, it will now be possible to request a binding assessment from the General Financial Directorate to confirm the exemption for specific supplies of books and similar services. Magazines and newspapers are to remain at the reduced 12% VAT rate. 

According to the government, activities which in its opinion are without demonstrable social or health significance should be moved to the basic VAT rate, e.g. those which were included in the reduced rate due to the COVID-19 pandemic or EET, such as hairdressing services, shoe repairs, collection, and the transport and storage of municipal waste. 

The possibility of deducting VAT on passenger cars will be limited to CZK 420,000, which corresponds to a tax base of CZK 2 million, not only for the purchase of such a car, but also including any subsequent technical assessment. The Ministry of Finance plans to further consult the European Commission on this change.

Excise taxes

The government proclaims the slogan Let's Raise Taxes on Vices and in line with this approach proposes to increase excise duties on tobacco and alcohol and taxes on gambling. According to estimates, this increase will bring over CZK 10 billion to the state budget.

What next?

We would like to remind you that the consolidation package in its current form is awaiting the incorporation of any changes from the comment procedure. According to preliminary information, once approved by the government, the relevant amendments should commence to be discussed in the chamber of deputies in June. In view of the public debate, it can be expected that the package will be amended. We will therefore continue to monitor the legislative process.

Updated on 3 July, 2023.