The governing coalition has agreed on amendments to the bill on the consolidation of public budgets (consolidation package with planned effect from 1 January 2024). The bill has already passed its first reading in the chamber of deputies. Below, we are summarising the main tax areas covered by the amending proposal. The final wording will be further discussed by the deputies and possibly in the senate.
We have previously written about the consolidation package here.
Possibility to keep accounts in foreign currency
Starting from January 2024, entities will be able to keep their accounts in a foreign currency (euros, US dollars, or British pounds) if it is their functional currency. An entity’s functional currency is only generally defined as the currency of the primary economic environment in which the entity operates, and its specification should be based on international accounting standards. More detailed rules will be set in an implementing decree.
The related amendment to the Income Tax Act does not contain any provisions adjusting the tax base in connection with accounting in a foreign currency. To determine the tax base, the accounting profit or loss in a foreign currency shall be used, and the tax shall also be calculated in the foreign currency. However, the financial administration’s information system does not yet allow for the administration of taxes in foreign currencies, so in the tax return, the taxpayer will have to translate the tax using the exchange rate effective at the end of the taxable period. While it will be possible to pay the tax in the foreign currency, it will be recorded in the taxpayer's personal account in Czech crowns, in the amount that was credited to the financial administration's account (i.e., not in the amount stated in the tax return).
Possibility to tax only realised foreign exchange (FX) differences
Payers of income tax will be able to exclude unrealised FX differences from their tax base in the period when they arise (are recognised) and only include them in the tax base in the period when the FX difference is realised. If taxpayers choose this option, they must apply this method consistently for all FX differences (gains and losses) relating to all assets and liabilities and must inform the tax administrator of the application or non-application of this tax regime within a set deadline. The period for which a taxpayer chooses not to tax unrealised FX differences should not be shorter than three taxable periods. When discontinuing this tax regime, any FX differences that have been excluded from the tax base and for which the profit or loss has not yet been adjusted will need to be taxed. The same applies when the company undergoes a transformation or enters into liquidation, among others.
Reporting of income flowing to a tax non-resident
The consolidation package also regulates the reporting obligation for income flowing to a tax non-resident from sources in the Czech Republic. Income from royalties, dividends and interest, including capital gains defined for taxation purposes similarly to dividends and interest, will be subject to the reporting obligation (even if exempt from tax or not subject to taxation in the Czech Republic). For interest income, the current exemption will be maintained if such interest income does not exceed CZK 300 thousand per calendar month.
Cancellation of registration obligation for payers of personal income tax and some other taxpayers
To reduce the administrative burden, the consolidation package proposes to abolish the registration obligation for payers of personal income tax (both residents and non-residents) and the registration obligation for payers of income tax where the tax is collected by withholding.
Reports on income tax paid and sustainability reports
For large multinational groups, the obligation to publish reports on income tax paid (public country- by-country reporting) has been moved from the new draft Accounting Act to the consolidation package. This obligation applies to taxable periods beginning after 22 June 2024.
Furthermore, the obligation of selected corporate groups to report on their sustainability, as laid down in the EU directive, has also been moved to the consolidation package and should be applicable for accounting periods starting from 1 January 2024.
Taxation of non-financial employee benefits
The amending proposal keeps the advantageous tax treatment of employee benefits but introduces an exemption limit at half of the average wage for the taxable period, which for the purposes of the Income Tax Act is the average wage determined under the law regulating social security contributions and announced annually by a government decree. For 2023, the average wage is set at CZK 40,324, which means that defined non-financial employee benefits up to the aggregate limit of CZK 20,162 should be exempt from tax on the employee’s part. The limit should be assessed separately for each employer. Based on a transitional provision, the new limit for the exemption of non-financial benefits should apply to benefits provided by the employer after the effective date of the amendment. Non-financial benefits provided before the amendment’s effective date are to be treated according to the original wording of the law.
Abolition of exemption for managers’ accommodations
The draft abolishes the exemption for this form of remuneration provided to selected workers. A transitional provision should ensure that the abolition of the exemption shall not affect persons already residing in such accommodations prior to the effective date of the law.
Changes to refreshments provided at workplace and business lunches
According to the legislators' interpretation, the provision of light refreshments at the workplace (not reaching the scope of a full breakfast, lunch or dinner) in the context of performance of dependent activity should not constitute an employee's taxable income but the provision of working conditions at the workplace. Business lunches or breakfasts with business partners in which employees participate as part of the performance of their work duties should be viewed similarly.
Limitation on exemption of income from sale of securities and shares (ownership interests)
For the exemption of income from the sale of securities or shares after the expiry of the ‘time test’ only up to CZK 40 million per taxable period, the draft newly proposes to postpone the effectiveness of this measure by one year, i.e., to 1 January 2025.
Simplified records for agreements to perform work
Compared to the original proposal, the record-keeping of agreements to perform work outside employment should be simplified. Details are being prepared by the Ministry of Labour and Social Affairs.
Changes in payment of social security premiums for concurring agreements to perform work with more than one employer
If agreements to perform work outside employment concluded with more than one employer overlap and the cumulative limit for participation in the social security insurance scheme is exceeded, the employee and not the employer will be obliged to pay their share of insurance premiums equal to 7.1% to the relevant Social Security Administration.
Unlike under the previous wording of the bill, employees will not have the obligation to notify their employers of their further agreements to perform work concluded with other employers. Whether the obligation to participate in the social security insurance scheme has arisen in each month because the cumulative limit has been exceeded will be evaluated retrospectively by the Czech Social Security Administration, which will then notify all employers and the employee.
A new obligation will be introduced for employers: to notify an employee working under an agreement to perform work outside employment, no later than on the day of commencement of work, of a possible obligation to pay social security premiums.
Please note that a similar change has not yet been proposed for health insurance premiums even though the obligation to pay health insurance premiums for agreements to perform work is directly linked to the Sickness Insurance Act. Due to the absence of the regulation in the Health Insurance Act, employers will have to deal with retrospective payment of health insurance premiums for themselves, and for the employees. How the employer shall, retrospectively, collect the health insurance premiums from the employee or whether late payment of health insurance premiums will be sanctioned by health insurance companies remains unresolved.
The VAT rate for newspapers and periodicals should be unified by reclassifying newspapers from the 21% rate to the lower rate of 12%.
The draft proposes a slower increase (in terms of rates and time span) in the excise duty on electronic cigarettes, including nicotine pouches. In contrast, the excise duty on alcohol should increase.
Real estate tax
The coalition’s amending proposal cancels the plan to distribute real estate tax revenue between the municipal and state budgets and returns to the currently existing model of one real estate tax. The increase in real estate tax revenues is to be implemented through an increase in tax rates, which is proposed on average at 1.8 times the current tax rates. For example, tax on paved areas used for business purposes is to be increased from CZK 5 per sqm to CZK 9 per sqm, and tax on taxable buildings and units serving for business in industry, construction, transport and energy from CZK 10 per sqm to CZK 18 per sqm. As a result of this measure, the state expects to increase the total real estate tax revenue from CZK 12.4 billion in 2022 to CZK 22.4 billion in 2024. The increase in revenue of CZK 10 billion for municipalities will be compensated by the state by reducing the allocation of shared taxes.
An increase of the minimum tax for one slot machine to CZK 13,400 has been proposed. The allocation of gambling tax revenues to individual budgets is also to change – the state’s share should increase to 55%, and the remainder should be distributed to municipalities based on set criteria (number of inhabitants, number of permitted slot machines).