Consolidation package II: Changes to personal income tax and social security

Extension of tax progression

• The threshold for applying the 23% tax rate should decrease from four to three times the average monthly wage. At the current average wage level, this means that the annual tax base of up to CZK 1,451,664 will be taxed at a 15% tax rate, and the part of the tax base exceeding this value will be taxed at a rate of 23% (the current annual threshold from which the higher tax rate applies is CZK 1,935,552).
• For income derived from agreements on work performance, the application of withholding tax pursuant to Section 6(4) of the ITA will not be linked to a fixed amount of CZK 10,000, as is the case now, but to the amount decisive for the participation of employees working on the basis of an agreement on work performance in sickness insurance, i.e. 25% of the average wage determined by the Act on Sickness Insurance.

Abolition of exemptions of non-cash benefits (and several others)

• Removal of the exemption of non-monetary benefits provided by the employer to the employee and/or their family members (e.g. provision of recreation, trips, the possibility to purchase goods and services from a medical facility, contribution to cultural and sporting events, contribution to printed books, etc.). This would mean that these non-monetary benefits would now be subject to taxation in the same way as wages and would therefore also be subject to social security and health insurance contributions.
• Abolition of the exemption for excess meal vouchers and introduction of the same exemption limit as for the so-called meal voucher lump sum. This would unify the taxation of meal allowances on the part of employees by limiting the exemption for all types of meals provided to 70% of the upper limit of the meal allowance for a 5-12 hour working trip, which currently amounts to CZK 107.10. In addition, a new condition should be introduced for the exemption of employee-side meal allowances, namely that the employee's presence at work during the shift or within one working day for employees without fixed hours (e.g., members of company bodies, etc.), should be at least 3 hours.
• Abolition of the exemption of the state contribution to building savings.
• Abolition of the separate exemption for foreign exchange gains on money exchanges. Taxpayers will now be able to apply an exemption on these foreign exchange gains up to the general limit for the exemption of other income (in aggregate up to CZK 50,000).

Abolition of personal tax deductions and discounts

The government proposes to:

• ·abolish the deduction of contributions to trade unions
• do away with the deduction for examinations verifying the results of further education
•  have the spouse discount apply only to the other spouse living in a jointly managed household with the taxpayer and caring for a child under three years of age, if the annual gross income of the other spouse does not exceed CZK 68,000. The bill now explicitly defines what income will not be included in the above income limit.
• abolish tax credits for students
•  eliminate the discounts for placing a child in a pre-school institution.
   

Restrictions on exemptions for sales of securities and shares

If the specified time test for the sale of securities (three years) or shares in companies (five years) is met, income up to CZK 40,000,000 per taxpayer and per tax period will be newly exempt from tax, rather than the entire income as before.  The taxable income will be determined proportionally according to the proportion of the total income exceeding CZK 40,000,000 to the total exempt income. Expenses related to non-exempt income, i.e., the purchase price of securities or shares, will be eligible for pro rata application to expenses. In the case of securities and business shares acquired before 31 December 2023, instead of applying the acquisition price of the share or share on a pro rata basis, the taxpayer may apply the market value of the share or share as determined on 31 December 2023 in accordance with the Act on Valuation of Property, plus related expenses (e.g., payments for trading on the market, etc.).

This approach is to ensure that only increases in the value of securities and shares that occur from 1 January 2024, i.e., after the amendment comes into force, will be subject to income tax.

Taxpayers who transfer securities or shares before 31 January 2024 but receive income from the sale after that date (e.g., instalment sales) will also apply this procedure. These taxpayers will have the choice of applying either the market value determined on 31 December 2023, or the market value determined at the time of the transfer of the securities and shares for consideration to their costs.

General limits on exemption of other income

A general limit for the exemption of other income up to CZK 50,000 per year per taxpayer should be introduced. The limit will only apply to specified types of other income, including, e.g., income from casual activities, gifts or income from sweepstakes and gambling.  The above limit will also include, e.g., exchange gains on the exchange of money from a foreign currency account, whose exemption is to be abolished by the amendment.

Reduction of non-cash income for employee vehicles

The amount of an employee's monthly non-cash income when using a vehicle for private and business purposes will be 0.25% of the purchase price for emission-free vehicles.

Donations to Ukraine

The amendment extends the validity of the measures related to the armed conflict in Ukraine and introduced by Act No. 128/2022 Coll. to the tax period of 2023. Thus, e.g. the 30% limits on gifts provided in connection with the armed conflict in Ukraine and exempt temporary accommodation provided by the employer will remain in force. According to an explanatory memorandum, the taxpaying employer will have to reimburse the taxpaying employee in the form of a correction of the individual affected months of the payroll register in accordance with Section 38i of the Income Tax Act. At the same time, this correction will also result in the reimbursement of social security and health insurance premiums, if paid.

Changes to social security

Employees

Reintroduction of sickness insurance

The government's recovery package reintroduces sickness insurance paid by the employee at the rate of 0.6% of the monthly assessment base (gross wages). Currently, sickness insurance is paid only by the employer. As of January 2024, the total social security contributions for the employee would thus increase to 7.1% (instead of 6.5%).

Changes to insurance contributions for work performance agreements

The amendment establishes two limits for the participation in sickness insurance of employees who work under an agreement or several agreements on work performance, namely:

• The first limit will be set for all agreements on the performance of work with one employer at 25% of the average wage (i.e., currently about CZK 10,080).
• The second limit (higher) will be set for the participation in the insurance when several agreements on work performance with several employers are combined, i.e., 40% of the average wage.

Once this limit is exceeded, the employer will have to pay social insurance contributions on behalf of the person working under a work performance agreement. The same limits should also apply to health insurance contributions, as the obligation to contribute is linked to participation in sickness insurance.

Self-employed persons

It is proposed to gradually increase the minimum assessment base for social insurance contributions for self-employed workers from the current 25% of the average wage to 40% of the average wage. All self-employed persons will be affected by an increase in the percentage threshold of the tax base for calculating the social security contributions from the current 50% to 55% of the tax base.

The article was updated on 3 July 2023.