Czech Republic Personal Income Tax

Czech residents are subject to tax on their worldwide income. Nonresidents are subject to tax on Czech-source income only. Nonresidents are taxed as residents on their Czech-source income, except for certain types of income. In addition, they may not qualify for certain tax-deductible items and tax reliefs.

The term “resident” includes any person residing in the Czech Republic for at least 183 days within a calendar year or having a residence (permanent home) in the Czech Republic. Employment income received by a nonresident whose employment activity in the Czech Republic does not exceed 183 days during any 12 suc­cessive calendar-month period is exempt from tax in the Czech Republic if it is paid by a foreign entity without a permanent establishment in the Czech Republic and if no economic employ­ment exists in the Czech Republic.

Income subject to tax. The taxation of various types of income is described below.

Employment income. Employment income includes salaries, wages, bonuses, other compensation of a similar nature and most benefits in kind. Employment income also includes fees paid to directors and shareholders of private limited companies and to limited partners of limited partnerships for work performed for the company or partnership, regardless of whether their position with the entity is one of authority.

The tax base for employment income equals the sum of the gross income of the employee and the employer’s portion of mandatory Czech social security and health insurance contributions. For employees who are not subject to the Czech social security and/ or health insurance system, the tax base for employment income equals the sum of gross income of the employee and the employer’s portion of deemed mandatory Czech social security and/or health insurance contributions.

Individuals assigned by a foreign employer to the Czech Republic who continue to be employed and paid by the foreign employer, and who perform work for and under the instruction of a Czech resident individual or legal entity, are deemed to be employed by the Czech resident individual or legal entity, and their employ­ment income is subject to monthly payroll tax withholding.

Self-employment and business income. Taxable self-employment and business income consists of income from business activities and professional services, less deductible expenses. Authors, lectur­ers, athletes and artists are considered providers of professional services. Net income from business activities and professional ser­vices is subject to tax with other income at the rates set forth in Rates.

Investment income. Czech-source interest income derived from personal investments is subject to a 15% final withholding tax. However, if the source of the interest income is part of the indi­vidual’s business activities, the interest income is taxed in the individual’s tax return. Other investment income, in cluding divi­dends and limited partners’ shares of partnership profits, is sub­ject to a 15% final withholding tax. Nonrecurring income (for example, arbitration awards) is generally taxed with other ordi­nary income at the rates set forth in Rates.

A 35% final withholding tax applies to the above-mentioned types of income (other than income from lease-purchase con­tracts) subject to final withholding tax for tax residents of coun­tries that have not entered into a valid double tax treaty or treaty on exchange of information with the Czech Republic.

Dividend and interest income derived by a resident from foreign sources is taxed in the individual’s tax return.

For the rates applicable to certain types of income of nonresi­dents, see Rates.

Rental income. Income derived from the rental of immovable and movable assets is taxed in the annual tax return together with other types of income at the rates set forth in Rates.

Capital gains and losses. Capital gains derived from the sale of property acquired for the purpose of resale or exchange for profit are taxed as ordinary income at the rates set forth in Rates. Capital gains realized from the sale of real estate or personal property not acquired for resale are generally exempt from income tax if the minimum required holding period is met. The minimum required holding periods are 12 months for automo­biles, 2 years for a primary residence and 5 years for other immovable property. Other holding periods apply to other types of personal property.

Effective from 2014, income from sale of shares is exempt from personal income tax if the total gross income from the sale of shares (without taking into account costs or deductions) does not exceed CZK100,000 in a calendar year. In addition, effective from 2014, income from the sale of securities is exempt from tax if the securities have been held for a period of more than three years. This rule applies to securities acquired after 31 December 2013. For securities acquired on or before that date, the prior rule applies. Under the prior rule, income from the sale of securities is exempt from tax if the securities have been held for a period of more than 6 months and if the individual had a direct share of less than 5% in the company in the 24-month period preceding the sale.

In general, capital losses derived from the sale of securities can­not be carried forward, and they can be offset only against gains derived from the sale of other securities during the same tax period. The same rule applies to movable assets or immovable property. As a result, gains derived from the sales of such assets can be offset only against losses derived from the sales of the same types of assets.

Taxation of employer-provided stock options. No specific law in the Czech Republic addresses the tax treatment of stock options.

In general, employer-provided stock options do not result in a taxable event until the option is exercised if the following condi­tions are met:

  • The exercise price equals the fair market value of the underly­ing stock at the date of grant.
  • The option is not transferable.
  • The option is subject to a suspensive condition and is capable of lapsing before it vests (for example, if the option holder ceases to be an employee).

However, this treatment is not a settled matter, particularly whether the taxable event occurs at grant, vesting or exercise. Readers are encouraged to consult with professional advisors on this matter. The taxation of stock options must be examined on a case-by-case basis.

The difference between the exercise price and the fair market value of the stock at the date of exercise is generally taxed as em­ployment income at the exercise date, at the same tax rate appli­cable to other employment income. Capital gains derived from the sale of shares by an individual are taxed as described in Capital gains and losses. If the capital gains are not exempt from income tax, the excess of the sale proceeds over the exercise price is taxable, at the rate set forth in Rates, in the year of disposal.

Business deductions. In general, expenses and costs are consid­ered to be deductible for tax purposes if they are incurred to generate, assure and maintain taxable income. In addition, the law explicitly provides that certain expenses are deductible (for example, depreciation) and that certain expenses are not deduct­ible (for example, representation expenses).

Instead of deducting actual expenses, taxpayers engaged in cer­tain business activities may choose to deduct a percentage of gross revenues as lump-sum costs. The percentage of lump-sum costs varies depending on the individual’s business activity, as indicated in the following table.

 

Activity Deductible rate (%)
Agriculture, forestry, fishing, farming, and craft 80
Trade license income 60
Licensing intellectual property rights (inventions and copyrights), sole proprietorships and other business income 40
Rental 30

The lump-sum costs for the activities listed above are limited to the following amounts:

  • 80% deductible rate: CZK1,600,000
  • 60% deductible rate: CZK1,200,000
  • 40% deductible rate: CZK800,000
  • 30% deductible rate: CZK600,000

In addition, individuals applying lump-sum costs for more than 50% of their tax base cannot benefit from certain tax reliefs. For further details, see Tax reliefs.

Rates. Taxable income of residents and nonresidents, other than income subject to withholding tax, is taxed at a flat rate of 15%.

Royalties and fees for professional services, such as directors’ fees and payments under management or consultancy agree­ments, derived by nonresidents are subject to a 15% withholding tax. Nonresidents’ rental income is subject to a 5% final with­holding tax on lease-purchase contracts and to a 15% final with­holding tax on other rental income of movable property. These rates may be reduced under applicable tax treaties.

Solidarity surcharge. A solidarity surcharge of 7% applies to annual income from employment and net income from self-employment (business activities) exceeding 48 times the monthly average salary (CZK1,296,288 in 2016).

Employers also must consider the solidarity surcharge in their monthly payroll calculations. On a monthly basis, the solidarity surcharge of 7% applies to employment income exceeding CZK108,024 in 2016. Employees whose income is subject to the solidarity surcharge on an annual basis (because their income exceeds CZK1,296,288) must file an annual tax return.

Tax reliefs. Czech tax residents may subtract tax reliefs from their annual tax liability. The amounts of these reliefs for 2016 are described below.

The annual personal tax relief is CZK24,840. In addition, tax relief of CZK24,840 is granted for a spouse living in the same household with the taxpayer, unless the spouse’s annual income exceeds CZK68,000.

Additional personal tax relief of CZK2,520 is granted for par­tially disabled persons and of CZK5,040 for totally disabled persons.

Tax relief of CZK13,404 is granted for the first dependent child. If an individual has more children, the tax relief on the second child is CZK15,804 and the tax relief for the third and each addi­tional child is CZK17,004.

The amount of child deductions will be most likely amended dur­ing 2016. The following will be the new amounts of the deduc­tions:

  • CZK13,404 for the first dependent child
  • CZK17,004 for the second dependent child
  • CZK20,604 for the third and each additional child

The amendment of the Income Tax Act is currently in the legisla­tive process and will likely be approved during 2016. The increased amount of child deductions will apply retrospectively for all of 2016.

The tax reliefs, except for the personal tax relief, are available to Czech tax residents. Also, these are available to tax residents of European Union (EU) countries, Iceland and Norway if their Czech-source income accounts for at least 90% of their total annual income. To apply the tax reliefs, Czech tax nonresidents must submit the official confirmation of the worldwide income provided by the foreign tax authorities.

Individuals applying lump-sum costs for more than 50% of their total tax base cannot apply the relief for a spouse living in the same household and the dependent child relief.

Relief for losses. Losses incurred in self-employment or rental activities may be carried forward for five years.

Inheritance and gift taxes

Effective from 2014, inheritance and gift taxes are incorporated in the income tax; that is, the same basic rules apply to the taxa­tion of gifts. In general, Czech residents are subject to tax on their worldwide gifts, and nonresidents are subject to tax on Czech-source gifts only.

The following groups of gifts are exempt from tax:

  • Gifts received from lineal relatives, a spouse, minor relatives, such as brothers and sisters, lineal relatives of a spouse, chil­dren’s spouses, nieces, uncles and aunts
  • Gifts received from persons who lived with the transferor lon­ger than one year in one household
  • Property of a beneficiary that has been allocated to a trust fund by any of the persons mentioned above
  • Gifts received occasionally up to the amount of CZK15,000 per year

All taxpayers are exempt from inheritance tax.

Social security

Contributions. Social security and health insurance contributions are paid by both the employer and the employee on employment income at the following rates.

 

Social security Employer

%

Employee

%

Total

%

Old-age pension 21.5 6.5 28
Sickness 2.3 2.3
Unemployment 1.2 1.2
Health insurance 9.0 4.5 13.5

 

The maximum assessment base for health insurance contribu­tions was canceled, effective from 2013. The second pension insurance pillar is canceled, effective from 2016.

The maximum assessment base for social security contributions equals 48 times the monthly average salary. For 2016, the maxi­mum annual assessment base for social security contributions is CZK1,296,288. Income above the limit is not subject to social security contributions, with certain exceptions for situations in which the individual has multiple employers during the year. In such circumstances, the maximum assessment base applies to each employer separately. However, the employee remains sub­ject to one maximum assessment base.

EU social security legislation and totalization agreements. As a member state of the EU, the Czech Republic is bound by the EU Social Security Regulations (currently applicable to all member states of the European Economic Area [EEA] and Switzerland) and other EU law. In addition, to prevent double social security taxation and to assure benefit coverage, the Czech Republic has entered into totalization agreements with several non-EU juris­dictions, including Australia, Bosnia and Herzegovina, Canada, Chile, India, Israel, Japan, Korea (South), Macedonia, Moldova, Montenegro, Quebec, the Russian Federation, Serbia, Turkey, Ukraine and the United States.

Tax filing and payment procedures

The tax year for individuals is the calendar year. Individual tax returns must be filed by 1 April of the following year. Extensions may be granted until 1 July. By additional application, the dead­line may be extended to 1 November for individuals who must include foreign-source income in their Czech tax return. The tax is due by the deadline for filing the tax return.

Czech employers must withhold monthly payroll tax advances from all compensation paid to their legal or deemed (economic) employees.

Joint taxation of married couples is not available in the Czech Republic.

Effective from 2015, individuals must submit a notification of tax-exempt income exceeding CZK5 million received after 1 January 2015 to the Czech tax authorities. Such income must be reported to the tax authorities by the deadline for filing the tax return. Fines of up to 15% of the tax-exempt income can be lev­ied for failing to meet the obligation. Individuals who are not required to file a tax return must also file this notification.

Double tax relief and tax treaties

The Czech Republic has entered into double tax treaties with the following jurisdictions.

Albania                        Iceland                           Philippines

Armenia                       India                              Poland

Australia                      Indonesia                       Portugal

Austria                         Ireland                           Romania

Azerbaijan                    Israel                              Russian

Bahrain                        Jordan                            Federation

Barbados                      Kazakhstan                    Saudi Arabia

Belarus                         Korea (North)                Serbia and

Belgium                       Korea (South)                Montenegro

Bosnia and                   Kuwait                           Singapore

Herzegovina                 Latvia                             Slovak Republic

Bulgaria                       Lebanon                         Slovenia

Canada                         Liechtenstein                  South Africa

China                           Lithuania                        Switzerland

Colombia                     Luxembourg                  Syria

Croatia                         Macedonia                     Tajikistan

Cyprus                         Malaysia                        Thailand

Denmark                      Malta                             Turkey

Egypt                           Mexico                          Ukraine

Estonia                         Moldova                        United Arab

Ethiopia                        Mongolia                       Emirates

Finland                         Morocco                        United States

France                          New Zealand                 Uzbekistan

Georgia                        Norway                         Venezuela

Hong Kong SAR         Pakistan                         Vietnam

Hungary                       Panama

The Czech Republic also honors the double tax treaties of the former Czecho slovakia with the following countries.

Brazil                           Japan                             Sri Lanka

Germany                      Netherlands                   Sweden

Greece                          Nigeria                           Tunisia

Italy                              Spain                             United Kingdom

Immigration requirements

Foreigners coming from EU and non-EU countries must satisfy immigration obligations.

Non-EU nationals. Foreign nationals residing in the countries for which a visa is not required can enter the Czech Republic without a visa and stay in the Czech Republic (and the other Schengen countries) for up to 90 days during a 180-day period. The 90-day period is counted from the first day of entry into the Schengen area.

This possibility to stay in the Czech Republic without a visa does not apply to non-EU nationals who work or perform other eco­nomic activities in the Czech Republic. These individuals need a proper type of work or entrepreneur visa unless they meet certain criteria to avoid this obligation.

For all non-EU nationals, a longer stay than 90 days in a 180-day period is possible only with a long-term visa or relevant resi­dence permit (see Long-term visa and Employee Card below and Blue Card in Section G). A visa or residence permit is issued for a single purpose, such as for business, studies or employment. A foreign national working in the Czech Republic without a visa or residence permit may be subject to deportation, and significant fines can be assessed on Czech companies if the foreign national performs work without the respective permit.

Long-term visa and Employee Card. A long-term visa for a stay exceeding 90 days is issued based on an application filed at a Czech embassy or consulate abroad. The process takes up to three months.

The long-term visa can be issued for a period of up to one year. If the purpose of the visit remains the same, the stay in the Czech Republic may be extended. The visa is then replaced by a resi­dence permit that can be issued for a period of up to two years and may be renewed repeatedly.

As a result of changes to the immigration law, effective from 24 June 2014, all non-EU nationals intending to work in the Czech Republic must obtain an Employee Card, which is granted by the Czech Ministry of Interior. This obligation applies to non­EU nationals who intend to work in the Czech Republic under an employment contract with a Czech company or are assigned to the Czech Republic by their foreign employer.

The Employee Card has two forms. The dual version combines a work permit and residence permit and is intended for all non-EU nationals employed by a Czech entity. The non-dual version of the Employee Card needs to be supported by the work permit granted by the Czech Labour Office and is intended mainly for the assigned non-EU individuals without an employment contract with a Czech entity. The government processing can take a total of approximately three months. The Employee Card in both forms can be valid for up to two years and can be further extend­ed in the Czech Republic.

Health insurance requirements. For short-term stays (up to 90 days), foreigners must arrange travel health insurance to cover any medical costs and expenses that might arise in connection with emergency health treatment, repatriation or death during their stay in EU member states. The insurance must be valid throughout the territory of the member states and cover the entire period of the person’s intended stay or transit. The minimum coverage is EUR30,000 per insured event without any co-insur­ance or co-payment.

Foreigners must also present a document proving their health insurance coverage when they apply for or collect their short-term visa.

For stays longer than 90 days, foreigners must prove that they have travel health insurance covering treatment related to an accident or sudden illness in the Czech Republic (for example, hospital room, doctor’s fees, medication, ambulance, medical evacuation and accidental death), including the cost of transfer of a diseased person or the remains of a deceased person to his or her home country. The insurance policy may not exclude cover­age for injuries and damage caused by the applicant’s intentional acts, injuries and damage caused by fault or contributory fault on the part of the applicant, and injuries and damage caused by the consumption of alcoholic, narcotic and psychotropic substances by the applicant. The minimum coverage is EUR60,000 per insured event without any co-insurance or co-payment.

Travel medical insurance may be purchased from the following:

  • An insurance company licensed to sell such insurance in the Czech Republic
  • An insurance company licensed to sell such insurance in any other EU member state or in any contracting party to the EEA agreement
  • An insurance company licensed to sell such insurance in the country that has issued the applicant’s travel document or in the applicant’s country of residence

The proof of travel medical insurance must be accompanied by a certified Czech translation of the insurance policy and general insurance terms and conditions, proving the existence of travel medical insurance, the scope of coverage, the amount of coverage and the absence of co-insurance or co-payment. The applicant may be asked to present proof of insurance covering the entire period of stay in the Czech Republic. The confirmation of health insurance is required when picking up the long-term visa.

When applying for extension of the long-term visa, foreign nationals must prove that their health insurance covers compre­hensive health care, including, for example, preventive care and that the health insurance was purchased from an insurance com­pany licensed to provide such insurance in the Czech Republic.

Registration of non-EU nationals after arrival in the Czech Republic. Non-EU nationals need to be registered with the Czech Foreigner’s Police within three working days after their arrival in the Czech Republic (unless they stay in a hotel and the registra­tion is processed automatically by the hotel). Individuals who will work in the Czech Republic need to visit the Czech Ministry of Interior instead to provide their biometric data that will be used for issuance of their Employee Card (see Section G). Non­EU nationals working in the Czech Republic need to be also registered at the Czech Labour Office on their first working day at the latest.

EU nationals. No visas or work permits are required for the EU nationals.

EU nationals need to be registered at the Labour Office by a company for which they perform their work on their first work­ing day at the latest. In addition, they must process their registra­tion with the Czech Foreigner’s Police within 30 days after their arrival (if not processed via a hotel). A residence permit is not mandatory but is recommended if the EU national intends to stay and/or work in the Czech Republic for a period exceeding three months, because it is usually needed for car registration, closing a contract with a phone provider, buying property in the Czech Republic and other transactions. EU nationals must be covered by health insurance during their stay in the Czech Republic. An EU Health Insurance Card satisfies this requirement.

Business visitors. In general, a non-EU national who is in the Czech Republic on a short-term (few days) business trip is not required to have a work permit or Employee Card. Non-EU nationals from countries with a free visa regime are not required to obtain a visa to travel to the Czech Republic. Non-EU nation­als from countries with a visa requirement need to apply for the business type of visa to be able to enter the Czech Republic.

Students. Students from non-EU countries intending to study in the Czech Republic for a period exceeding 90 days may apply for a long-term study visa. Students from non-EU countries with the visa-entry obligation may need a study visa for a short-term study stay under 90 days. Non-EU students intending to work in the Czech Republic do not need to obtain work permits if they are studying or have completed studies at a Czech high school, uni­versity or artists’ school accredited in the Czech Republic.

Trainees. Since 2014, a special regime applies to non-EU nation­al trainees assigned to the Czech Republic. These individuals may apply for the same immigration permits as the standard assignees or undertake a simplified immigration procedure. This simplified procedure avoids the obligation to apply for a work permit or Employee Card if the trainees’ work in the Czech Republic will not exceed six months and the substance of the work will be experience and training for their future career in a “home country company.” Before the assignment of trainees, the Czech company may qualify for the simplified procedure by fil­ing a special request and meeting certain conditions.

Termination of the stay. The termination of work in the Czech Republic for both EU nationals and non-EU nationals must be reported to the Labour Office. In addition, non-EU nationals must inform the Ministry of Interior about the termination of their stay and return the relevant residence permit (if applicable).

Work permits, Employee Cards, Blue Cards and self-employment

Local employees. A company intending to employ a non-EU national in the Czech Republic must register a job position with the Czech Labour Office. This registration is public, and the Czech Labour Office has 30 days to fill the position with a Czech or other EU national. If no appropriate candidate is found in the Czech Republic or in other EU countries, the position is regis­tered in the official database for Employee Cards and a non-EU national can apply for it by filing an application at the Czech embassy or consulate in his or her country of residence. The application for the Employee Card must be supported by the local employment contract or agreement on the future contract between the applicant and the Czech company. This contract must meet certain criteria relating to a working schedule and level of salary.

If the Ministry of Interior approves the application, the Czech embassy or consulate issues a special visa to the applicant to allow him or her to enter the Czech Republic and register with the Czech Ministry of Interior. On the finalization of this process, the non-EU national obtains the Employee Card in the form of a plastic biometric residence permit.

Assigned individuals. Assigned individuals (individuals who do not have a local employment contract) are required to apply for a work permit in the Czech Republic. After the work permit appli­cation is filed with the respective Labour Office, they are allowed to apply for the non-dual Employee Card. A Czech company must inform the Czech Labour Office about the assignment of a non-EU national to the Czech Republic. No testing of the Czech or EU labor market is required. On the collection of the work permit (to be delivered with the Employee Card application) and approval of the Employee Card application, the process of enter­ing the Czech Republic and collecting the Employee Card is the same as in the case of local employment.

The following assigned individuals (and some others) are exempt from the work permit obligation and need apply only for the non-dual Employee Card:

  • A holder of a Czech permanent residence permit
  • A foreigner who undertakes or completes studies at a high school or university accredited in the Czech Republic
  • A foreigner seconded to provide services in the Czech Republic on behalf of his or her employer with a seat in an EU country
  • A third-country citizen who is accompanied by his or her close family member (spouse, child or parent) from an EU country
  • A dependent of a non-EU national who is working in the Czech Republic based on a residence permit provided that the depen­dent holds a valid residence permit

Nevertheless, these individuals must register at the Czech Labour Office, and they are always required to obtain a relevant visa or residence permit.

Blue Card. A Blue Card is intended for the non-EU nationals with high qualifications who want to work in positions that are not covered by Czech or EU nationals.

Czech companies need to register positions available under the Blue Card procedure in the Blue Card register.

A Blue Card is a combination of a work permit and a visa in one document and allows the recipient to reside in the Czech Republic and work in a job for which the Blue Card is issued.

A Blue Card is issued to workers with high professional or uni­versity education who have already agreed on an employment contract with a Czech company. The contract must have a dura­tion of at least one year and meet certain other criteria.

A Blue Card is valid for the duration of the agreed employment contract plus three months.

The Blue Card is issued for a maximum period of two years. The application for a Blue Card must be submitted to the relevant embassy or consulate of the Czech Republic. The Blue Card is usually issued within three months.

Self-employed individuals

Self-employed individuals must have trade licenses to perform self-employment activities in the Czech Republic. In addition, non-EU nationals must obtain an entrepreneur type of visa.

To acquire this license, the individual must apply at the appropri­ate trade license office.

Family members

Non-EU national dependents of a long-term visa or Employee Card or Blue Card holder may stay in the Czech Republic based on a granted short-term or long-term visa for reunion purposes. The long-term visa may be further extended (based on a resi­dence permit application) in the Czech Republic.

The visa applications of the family members can be filed togeth­er with the main visa or residence permit holder (or later) with the Czech embassy or consulate abroad and is valid only for the validity period of the visa or residence permit of the main visa holder.

The visa applications of family members need to be filed togeth­er with, among other items, marriage and birth certificates and documents proving the financial support of the family by the main visa holder. All family members need to have required health insurance coverage (these are the same requirements specified in Section F).