On 1 January 2024, Act No.349/2023 Coll., on the consolidation of public budgets (the so-called consolidation package) entered into force. This is an extensive amendment amending more than sixty laws, which has recently been the subject of numerous debates.
The aim of the government's consolidation package is to reduce spending and increase state budget revenues. To this end, on the expenditure side, it is envisaged, for example, to reduce national subsidies, abolish some territorial offices of the Financial Administration, change the conditions for the payment of unemployment benefits (consisting in particular in extending the necessary period of participation in pension insurance to qualify for the benefit), reduce state support for building savings to a maximum of CZK 1 000, increase the price of motorway stamps along with the introduction of regular indexation of their price or abolish stamps as a means of payment.
In the following text, we summarise the contents of the government's consolidation package and present the key changes introduced by the law.
Changes to income tax, real estate tax, value added tax, excise and gambling taxes
🟣 CORPORATE INCOME TAX
The corporate income tax rate increases from the current 19% to 21%.
The payer is now obliged to report income of non-residents - exempt from withholding tax or not subject to taxation in the Czech Republic under an international treaty - only in the case of income from interest, royalties and dividends.
In addition, there is no obligation to report interest income unless it exceeds CZK 300 thousand. CZK per month. The rules for reporting income subject to withholding tax remain unchanged.
For legal entities, only realised (and therefore not unrealised) exchange rate transactions are subject to tax.
As of 1 January 2024, legal entities have the option to exclude unrealised exchange rate differences from the tax base in the period of their creation (recognition) and to include them in the tax base only in the period when the exchange rate difference is realised. The condition for applying this optional scheme is the need to notify the tax administration of entering this scheme. At the same time, the possibility of terminating this scheme is also limited, so that it is not possible to simply switch between the exclusion and non-exclusion schemes and thus purposely affect the tax base.
The limiting tax deductibility for the purchase of passenger cars for business purposes to the first CZK 2 million of the price of the cars is abolished in order to avoid the purchase of luxury cars for private purposes for the company. Thus, depreciation on the amount above CZK 2 million is not a tax deductible expense.
Extraordinary depreciation can be applied to electric cars acquired between 1 January 2024 and 31 December 2028. This will be the only item of newly acquired property for which extraordinary depreciation can be applied.
It introduces an obligation for large multinational groups to publish an income tax report for tax years beginning on 22 June 2024. In addition, selected groups must also file a sustainability report for tax years beginning on 1 January 2024.
🟣PERSONAL INCOME TAX
The personal income band within which the 23% tax rate applies starts at 3 times the average wage instead of 4 times the average wage (i.e. CZK 131,901 for 2024).
Sickness insurance for employees is reintroduced at 0.6% of the assessment base. As of January 2024, the total social insurance contributions for an employee will increase to 7.1% (instead of 6.5%). Employees working on the basis of an agreement for the performance of work from 1 July 2024 will now be subject to participation in sickness insurance if their income from all agreements with one employer exceeds 25% of the average wage (i.e. CZK 10,500 in 2024) or 40% of the average wage (i.e. CZK 17,500 in 2024) from all agreements with several employers.
However, in the case of multi-employer agreements, the employee pays part of the social security contribution of 7.1% on his/her own behalf. For the time being, the employer is still obliged to pay the health insurance for the employee.
Expenditure on non-monetary benefits provided to employees is tax deductible on the employer's side if it is taxable to the employee (i.e. above the value of the employee's exempt income) and the entitlement to receive it arises from either a contract, an internal regulation or a collective agreement.
The spouse's tax credit can now only be applied to a spouse caring for a child under 3 years of age.
The so-called "school fee deduction" will be abolished, meaning the tax discount for placing a child in a preschool facility. Additionally, the tax discount for students and the tax exemption for benefits related to managerial apartments will also be eliminated (a transitional provision ensures that individuals who resided in these apartments before the law took effect will not be affected). Furthermore, the tax exemption for income from lotteries and gambling will be reduced from the current 1 million CZK to 50,000 CZK.
The tax deductibility of silent wine as a gift up to CZK 500 for representation purposes or deduction of payments for examinations verifying the results of further education is also abolished. The limit for the exemption of the so-called meal voucher lump sum will also apply to meals provided in kind. The exemption for benefits provided from the cultural and social needs fund is abolished.
All previously tax-exempt non-monetary benefits provided by the employer to the employee are exempt from personal income tax for a given tax year on the part of the employee only up to half of the average wage.
In 2024, these benefits can be exempted up to a total of CZK 21,983 per year. The new limit will only apply to benefits provided by the employer after the amendment takes effect.
An annual limit for the exemption of other income of CZK 50,000 per taxpayer is introduced. The limit applies only to specified types of income.
When using emission-free vehicles for private and business purposes, an amount of 0.25% of the purchase price, including VAT, shall be included in the employee's salary as non-cash income.
The new exemption limit for income from the transfer of shares in business corporations and securities for consideration has been set at CZK 40 000 000 for the tax period effective from 1 January 2025. At the same time, it will be possible to revalue the acquisition value of these shares and securities as of 31 December 2024 so that only the increase in value after 1 January 2025 will be effectively taxed.
🟣VALUE ADDED TAX
Instead of the current three VAT rates, two new rates are introduced – a standard rate of 21% and a reduced rate of 12%.
At the same time, some items are being shifted between these categories.
Newly included in the standard VAT rate are services such as hairdressing and barber services, draft beer, services of authors and artists, municipal waste collection, transport, and processing, repairs of footwear, leather goods, and bicycles, cleaning services, and firewood.
Conversely, occasional and special scheduled public transport of passengers is moved from the standard to the reduced VAT rate.
Books are now completely exempt from VAT.
🟣REAL ESTATE TAX
There is an increase in the real estate tax. Due to the differentiation of its rates, the increase varies depending on each property subject to taxation - however, on average, the rates increase by 1.8 times compared to the current situation. In addition, as a tool to counteract the depreciation of the tax over time, an inflation coefficient is introduced (to be applied for the first time in 2025), according to which the tax is periodically increased. In addition, for agricultural land, the maximum permissible level of the local coefficient that municipalities can introduce is increased.
🟣EXCISE AND GAMBLING TAXES
A mechanism for periodic excise duty increases on alcohol, cigarettes, smoking tobacco, cigars and cigarillos between 2024 and 2027 is introduced. In addition, a new excise duty on e-cigarettes and nicotine sachets is introduced, as well as a mechanism for periodic increases between 2024 and 2027.
The second gambling tax rate is increased from 23% to 30% and the minimum tax for 1 gaming machine is increased to CZK 13,400.
Refunds for so-called green diesel will be determined according to the norms, which will eliminate the obligation for entrepreneurs to keep records of the actual consumption of mineral oils and should significantly reduce the administration on the part of entrepreneurs and the state. Green diesel means farmers' entitlement to a refund of part of the excise duty on mineral oils consumed for primary agricultural production (excluding fish farming).
Increase in the levy burden on self-employed persons
Between 2024 and 2026, the minimum assessment base for social insurance premiums for self-employed persons will increase from 25% to 40% of the average wage, i.e. by 5 percentage points per year, bringing the minimum assessment base closer to the level of the minimum wage. At the same time, self-employed persons will pay insurance premiums on at least 55% of the tax base instead of the current 50%. Both groups (employees and self-employed) are taxed equally at a tax rate of 15% for the tax base up to 36 times the average wage and 23% for the part of the tax base exceeding 36 times the average wage.
In the case of employees, the tax base is the gross salary, while in the case of self-employed persons, the tax base is the difference between income and expenses.
Bookkeeping in functional currency
Companies with the majority of transactions in foreign currency can, from January 1, 2024, maintain their accounting in functional currency (either EUR, USD, or GBP), if such a currency is the primary currency of the economic environment in which the accounting entity operates. While it will not be possible to directly use foreign currency for completing the income tax return temporarily, the benefit for taxpayers lies in the possibility of using functional currency in the steps necessary for preparing the tax return (i.e., conversion up to the level of aggregated items).
When calculating the tax, the result of operations in foreign currency is used. The items listed in the tax return will be converted into Czech korunas based on the exchange rates of the Czech National Bank (usually the rate at the end of the tax period). The limits set by the Income Tax Act will also be converted into the functional currency.
The tax can be paid in crowns or in foreign currency. Underpayments or overpayments due to exchange rate differences will not arise or be refundable.
Tax relief for work performance agreements and their registration
There are two new limits for participation in the insurance of an employee working on the basis of a temporary employment contract (and thus also limits for the payment of social security contributions), where the first limit is set for a temporary employment contract with one employer at 25% of the average wage and the second limit (higher) is set for participation in the insurance of multiple temporary employment contracts with multiple employers at 40% of the average wage. If the employee exceeds one or the other limit, the premium will already be paid. In order for the measure to be audited, a register of all FTAs and the income from these agreements is in place.
This is a solution to the current unfavourable situation where work performance agreements instead of casual employment are the only and frequent source of income for some employees, who do not participate in pension insurance because of this.
