GFD clarifies employee benefit treatment
An accompanying law to the JMHZ that amends the Income Tax Act is currently awaiting the president's signature. The amendment clarifies the rules for providing employee benefits with the aim of preventing salary/bonus swaps. Following this new regulation that responds to the SAC’s recent case law, the General Financial Directorate (GFD) has now issued additional information on the procedure for distinguishing between wage components and employee benefits.
More details about the adoption of the accompanying law to the Single Monthly Employer Reporting Act (in Czech Jednotné měsíční hlášení zaměstnavatele or JMHZ) can be found in our previous article here.
The amendment to the Income Tax Act specifies the tax treatment of employee benefits (Section 6(9)(d) of the Income Tax Act). To be tax exempt, specified non-financial benefits, e.g. for health, cultural, and sports purposes, must not be simultaneously considered wages, salaries, remuneration, or compensation for lost income. The amendment thus legislatively anchors the long-standing interpretation of the financial administration, according to which income linked to the performance of work should always be taxable.
In response to the adoption of the amendment to the Income Tax Act, the GFD has now issued its information explaining the reasons behind the amendment in more detail, confirming its aim to clearly distinguish between employee benefits and income linked to work performance, while only employee benefits may be exempt from tax on income from employment (dependent activity), subject to meeting additional legal conditions (purpose, total amount, non-deductible expenses on the employer's part).
According to the GFD's information, to distinguish between consideration for the performance of work on one hand, and employee benefits on the other, the provisions of the Labour Code commonly used in practice to calculate average earnings shall be applied. In general, employees are entitled to wages, salaries, or remuneration for the work they perform. The same treatment should also be used for income for the completion of extraordinary work tasks, half-yearly and annual bonuses, etc. Such payments are always subject to income tax on employment (dependent activity) and social security and health insurance contributions.
Contrariwise, employee benefits are, according to the GFD, benefits that the employer provides to the employee in addition to their regular wage, salary, or remuneration. They are linked to the very existence of the employment relationship, and their purpose is, e.g., to increase employee loyalty or the attractiveness of the employer in the labour market.
The amendment does not change the scope of possible purposes of leisure-related benefits and the limits set for their tax exemption.