Consolidation package: detailed overview of changes

Corporate income tax and accounting

Corporate income tax rate increase

The tax rate will increase from 19% to 21%.

 

Limitation of tax deductibility for selected costs/expenses

• The limitation of the tax deductibility of costs incurred to purchase passenger cars for business purposes will be introduced. Depreciation calculated on amounts exceeding CZK 2 million will not be deductible for income tax purposes.
• Extraordinary depreciation will be applicable for electric cars purchased between 1 January 2024 and 31 December 2028. This will be the only newly acquired asset for which extraordinary depreciation can be applied.
• The tax deductibility of costs for still wine provided as a gift of up to CZK 500 will be abolished. The exemption from excise duty remains unchanged.
• Expenses for non-financial benefits provided to employees will be tax deductible on the part of the employer if these are subject to taxation on the part of the employee (i.e., above the amount of the employee's exempt income) and if the entitlement to the non-financial benefits arises either from a contract, an internal regulation, or a collective agreement.
• Employee meal expenses will be fully tax-deductible on the employers’ part (current tax deductibility limits will become limits of tax exemption on the employees’ part).
• The deductibility of costs incurred for exams verifying the results of further education will be cancelled.

 

Reporting income flowing abroad

Taxpayers will be obliged to report income flowing to non-residents who are exempt from withholding tax or not subject to taxation in the Czech Republic under an international tax treaty only where it relates to income from interest, royalties, and dividends. Furthermore, no reporting obligation will apply to interest income not exceeding CZK 300 thousand per month. The rules for reporting income subject to withholding tax remain unchanged.

Functional currency

Entities will be able to keep accounts in a foreign currency (specifically in euros, US dollars, or British pounds) if it is their functional currency. This is understood to be the primary currency of the economic environment in which the entity operates.

The tax calculation will be based on the profit or loss denominated in the foreign currency. The items stated in tax returns will be translated into Czech crowns using the CNB's exchange rates (usually the exchange rate valid at the end of the taxable period). The limits set by the Income Tax Act will also be converted into functional currency.

It will be possible to pay tax in Czech crowns or in foreign currency. No underpayments or overpayments will arise from FX differences, i.e., no entitlement to refunds will originate.

Possibility to tax only realised FX differences

Payers of income tax will have the option to exclude unrealised FX differences from their tax base in the taxable period in which they arise (are recognised) and tax them only in the taxable period in which they are realised. They must inform the tax administrator about the application of this tax regime and must subsequently apply it to all FX differences that arise. The period for which the taxpayer will be in this regime should not be shorter than three taxable periods, and when discontinuing the regime, all previously untaxed FX differences will have to be additionally taxed.

Country by country reports and sustainability reports

Large multinational groups will now be obliged to publish reports on income tax paid (public country-by-country reporting) for taxable periods beginning on 22 June 2024. In addition, selected groups will also have to submit sustainability reports for taxable periods beginning on 1 January 2024.

 

 

Personal income tax

Progression extension

A higher tax rate of 23% will be applied already to income that is equal to or more than 36 times the average wage set by the Sickness Insurance Act, i.e., for 2024, more than CZK 1,582,812 per year (CZK 131,901 per month).

Changes in mandatory payments for agreements to complete a job (outside employment)

From 1 July 2024, the limit for the application of withholding tax and the limit for participation in social security and health insurance schemes will be set at 25% of the average wage for agreements with one employer (CZK 10,500 in 2024). For multiple agreements with several employers, the limit for participation in pension insurance is 40% of the average wage (CZK 17,500 in 2024).

 

Changes in the exemption of non-financial benefits

• A limit for the exemption of non-financial (leisure-time) benefits amounting to half of the average wage will be introduced. In 2024, it will thus be possible to exempt the benefits up to CZK 21,983 per year. The new limit will only apply to benefits provided by the employer after the amendment’s effective date.
• The exemption for managers’ accommodations will be abolished.
• The limit for the exemption of monetary meal allowances will also apply to meals provided in non-financial form.
• The exemption for benefits provided from the cultural and social fund will be abolished.

 

Abolition of certain items deductible from the tax base and tax credits/reliefs

• A tax credit for being a student and a tax credit for placing a child into pre-school facilities will be abolished. The tax credit for a spouse will be conditional on the spouse caring for a child under three years of age.
• The reduction of the tax base by payments for exams verifying the results of further education and of the reduction of the tax base by payments of membership fees to trade unions will be cancelled.

 

Limitation on exemption of income from the sale of securities and shares (ownership interests)

With effect from 1 January 2025, income from the sale of securities and shares/interests will be exempt from tax if the time test of three years for securities and five years for interests is met, but only up to CZK 40 million per taxpayer per taxable period. Taxpayers will be able to include the acquisition cost of non-exempt securities or interests in their expenses on a proportionate basis. Special rules will be laid down for determining the acquisition cost of securities and shares acquired before 31 December 2024.

 

Limit for exemption of other income

An annual limit of CZK 50 thousand for the exemption of other income will be introduced. The limit will apply only to specified types of income.

Decrease in non-financial income of employees using business cars for private purposes

When using zero-emission vehicles for private and business purposes, 0.25% of the purchase price including VAT will be included in the employee's salary as non-financial income.

 

Sickness insurance

Sickness insurance amounting to 0.6% of the assessment base will be reintroduced for employees. From January 2024, total social security contributions for employees will increase to 7.1% (instead of 6.5%).

From 1 July 2024, employees working based on agreements to complete a job (outside employment) will have to participate in sickness insurance if their income from all agreements with one employer exceeds 25% of the average wage (CZK 10,500 in 2024) or if their income from all agreements with multiple employers exceeds 40% of the average wage (CZK 17,500 in 2024). However, in the case of multiple agreements with more than one employer, the part of the social security contributions of 7.1% that is to be paid by the employee will be paid by the employees on their own behalf. The obligation to pay health insurance contributions on behalf of the employees will remain with the employers.

 

Self-employed

The minimum assessment base for social security contributions of self-employed persons will be increased from the current 25% of the average wage to 40% of the average wage. At the same time, the percentage of the tax base for the calculation of insurance contributions will also be increased from the current 50% to 55% of the tax base.

 

Prolongation of tax measures in relation to Ukraine

The following measures will be extended for 2023 (natural persons) and for taxable periods ending between 1 March 2022 and 29 February 2024 (legal entities):

• It will still be possible to deduct the value of gratuitous supplies up to 30% of the tax base (applicable universally).
• Tax-deductible gifts will continue to include donations related to Ukraine and persons established in Ukraine.

 

The following measures will also be extended to include supplies provided in 2023:

• An employee's income in the form of provided accommodation will continue to be tax exempt.
• Gratuitous income for the purpose of providing support to Ukraine's defence efforts will also remain tax exempt.
• It will still be possible to claim as a tax-deductible expense the value of a gratuitous non-financial benefit that cannot be deducted due to a low tax base.

Value added tax

Reduced tax rates will be unified into a single 12% rate, leaving only the rates of 21% and 12%. Some goods and services will shift from one rate category to another, e.g., activities without demonstrable social or health significance, and activities previously reclassified due to COVID-19 will be moved to the basic VAT rate category. These include, e.g., hairdressing services, repairs of shoes, leather products, and bicycles, or repairs and alterations of clothing. Newspapers and magazines will after all be subject to a 12% rate no matter how often they are published. For food services, beverages other than drinking water and selected beverages (e.g., milk) will need to be excluded from the 12% VAT.

From the very beginning of the consolidation package, it was proposed that the supply of books, both printed and electronic, be included in a new category of VAT-exempt supplies with the possibility of requesting a binding assessment from the General Financial Directorate.

In the third reading in the chamber of deputies, medical and diagnostic devices that will be subject to a reduced VAT rate were specified in more detail. Specifically, the condition that they be ordinarily intended for the exclusive personal use of the sick or disabled for the treatment of an illness or disability or to alleviate their consequences was excluded. Newly, frequently discussed contact lenses are also included among the goods subject to the reduced VAT rate.

We already informed you in detail about the issue of limiting the VAT deduction for passenger cars to CZK 420 thousand (corresponding to a purchase price of CZK 2 million). This concerns cars included in the fixed asset category. Therefore, in general, this may also affect lease companies where more expensive cars might be subject to double taxation. However, it cannot be ruled out that this potential discrepancy will be resolved by the interpretation of the law, as was indicated to us during discussions with tax administration representatives. The interpretation of the related transitional provisions is also unclear, especially where an advance payment for a specific car is made before the end of 2023. According to the wording of the transitional provisions, it could be inferred that if an advance for a specific car was paid in 2023, the limitation of the deduction would not apply.

Excise duties

All excise duty rates will gradually be increased. The duty on alcohol will increase significantly while the duty on electronic cigarettes, including nicotine pouches, will be increased more moderately.

Gambling tax

The minimum tax per slot machine will increase to CZK 13,400. 55% of gambling tax revenue will be state budget revenue.

Real estate tax

Real estate tax rates will on average increase 1.8 times the current rates. In addition, an inflation coefficient will be introduced as a tool to prevent the tax from decreasing in value over time (it will be first applied in 2025). Other changes include, e.g.:

• possibility for a municipality to choose a local coefficient in the range of 0.5–5 for all real estate; exceptions are selected agricultural plots of land, permanent grassland,  and unusable areas, for which the municipality can only choose a coefficient in the range of 0.5–1.5,
• changes in the subject of the tax and in tax exemptions,
• abolition of restrictions on the creation of paved areas used for business purposes that until now could only be created on certain types of land.