Radical changes to taxes and insurance contributions on the way

In the middle of May, the governing coalition introduced several legislative changes with which it intends to increase state budget revenues. The new rules will affect most corporations, employees, and entrepreneurs and are expected to apply from 1 January 2024. Here is an overview of the key propositions as they emanated from the initial legislative proposals published in the context of the public consultation procedure.

Tax rate increase 

For corporations, the most significant change will be a two-percentage point increase in the standard income tax rate from 19% to 21%. With this change, the government expects an annual increase in the state budget of CZK 22 billion by 2025.

Limitation of tax deductibility of selected costs

Regarding the deductibility of tax costs, the coalition proposes to:

• introduce a CZK 2 million limit for determining the input price of passenger cars for business purposes (i.e., any depreciation on the input price above CZK 2 million would be tax ineffective). For finance leases, the limitation will be applied to lessees by restricting the tax deductibility of lease payments, both in aggregate and for a single tax year.
• abolish the tax deductibility of non-sparkling wine as a gift up to CZK 500
• abolish the tax deduction of payments for examinations verifying the results of further education
• do away with the limitation on the deductibility of employee meal expenses and the tax non-deductibility of meal vouchers in excess of the statutory limit 
• introduce the extraordinary depreciation for electric cars purchased between 1 January 2024 and 31 December 2028
• abolish the tax non-recognition of expenses for certain employee benefits provided as non-monetary benefits (e.g., contributions to cultural events, trips, sporting events, etc.) for which the amendment will abolish their exemption on the part of employees
• eliminate the tax non-recognition for expenses exceeding income in facilities meeting the needs of employees. 

The tax deductibility of expenditures on the above benefits would become conditional on the right to the benefit being stated in the collective or employment agreement or in the employer's internal regulations.

Extension of tax progression

The threshold for applying the 23% tax rate should decrease from four to three times the average monthly wage. At the current average wage level, this means that the annual tax base of up to CZK 1,451,664 will be taxed at a 15% tax rate, and the part of the tax base exceeding this value will be taxed at a rate of 23% (the current annual threshold from which the higher tax rate applies is CZK 1,935,552).

For income derived from agreements on the basis of work performance, the application of withholding tax pursuant to Section 6(4) of the ITA will not be linked to a fixed amount of CZK 10,000, as is the case now, but to the amount decisive for the participation of employees working on the basis of an agreement on work performance in sickness insurance, i.e. 25% of the average wage determined by the Act on Sickness Insurance.

Abolition of exemption of non-cash benefits

Removing the exemption of non-monetary benefits provided by the employer to the employee and/or their family members (e.g. provision of recreation, trips, the possibility to purchase goods and services from a medical facility, contribution to cultural and sporting events, contribution to printed books, etc.), would mean that these non-monetary benefits would now be subject to taxation in the same way as wages and would therefore also be subject to social security and health insurance contributions.

The abolition of the exemption for excess meal vouchers and the introduction of the same exemption limit as for the so-called meal voucher lump sum would unify the taxation of meal allowances on the part of employees by limiting the exemption for all types of meals provided to 70% of the upper limit of the meal allowance for a 5-12 hour working trip, which currently amounts to CZK 107.10. In addition, a new condition should be introduced for the exemption of employee-side meal allowances, namely that the employee's presence at work during the shift should last at least 3 hours.

Abolition of personal tax deductions and discounts

The government proposes to:

• ·abolish the deduction of contributions to trade unions
• do away with the deduction for examinations verifying the results of further education
•  have the spouse discount apply only to the other spouse living in a jointly managed household with the taxpayer and caring for a child under three years of age, if the annual gross income of the other spouse does not exceed CZK 68,000. The bill now explicitly defines what income will not be included in the above income limit.
• abolish tax credits for students
•  eliminate the discounts for placing a child in a pre-school institution.

Restrictions on exemptions for sales of securities and shares 

If the specified time test for the sale of securities (three years) or shares in companies (five years) is met, income up to CZK 40,000,000 per taxpayer and per tax period will be newly exempt from tax, rather than the entire income as before.  The taxable income will be determined proportionally according to the proportion of the total income exceeding CZK 40,000,000 to the total exempt income. Expenses related to non-exempt income, i.e., the purchase price of securities or shares, will be eligible for pro rata application to expenses. In the case of securities and business shares acquired before 31 December 2023, instead of applying the acquisition price of the share or share on a pro rata basis, the taxpayer may apply the market value of the share or share as determined on 31 December 2023 in accordance with the Act on Valuation of Property, plus related expenses (e.g., payments for trading on the market, etc.).

This approach is to ensure that only increases in the value of securities and shares that occur from 1 January 2024, i.e., after the amendment comes into force, will be subject to income tax.

Other income

A general limit for the exemption of other income up to CZK 50,000 per year per taxpayer should be introduced. The limit will only apply to specified types of other income, including, e.g., income from casual activities, gifts or income from sweepstakes and gambling.  The above limit will also include, e.g., exchange gains on the exchange of money from a foreign currency account, whose exemption is to be abolished by the amendment.

Donations to Ukraine

The amendment extends the validity of the measures in the areas related to the armed conflict in Ukraine introduced by Act No. 128/2022 Coll. to the tax period of 2023. Thus, e.g. the 30% limits on gifts provided in connection with the armed conflict in Ukraine and exempt temporary accommodation provided by the employer will remain in force. According to the transitional provision, it is proposed that until the amendment comes into force, any temporary accommodation already taxed should be refunded to the taxpayer as an overpayment in the annual settlement of advances or in the tax return

Employees

Reintroduction of sickness insurance

The government's recovery package reintroduces sickness insurance paid by the employee at the rate of 0.6% of the monthly assessment base (gross wages). Currently, sickness insurance is paid only by the employer. As of January 2024, the total social security contributions for the employee would thus increase to 7.1% (instead of 6.5%).

Changes to insurance contributions for work performance agreements

The amendment establishes two limits for the participation in sickness insurance of employees who work under an agreement or several agreements on work performance, namely:

The first limit will be set for all agreements on the performance of work with one employer at 25% of the average wage (i.e., currently about CZK 10,080).

The second limit (higher) will be set for the participation in the insurance when several agreements on work performance with several employers are combined, i.e., 40% of the average wage.

Once this limit is exceeded, the employer will have to pay social insurance contributions on behalf of the person working under a work performance agreement. The same limits should also apply to health insurance contributions, as the obligation to contribute is linked to participation in sickness insurance.

Self-employed persons

It is proposed to gradually increase the minimum assessment base for social insurance contributions for self-employed workers from the current 25% of the average wage to 40% of the average wage. All self-employed persons will be affected by an increase in the percentage threshold of the tax base for calculating the social security contributions from the current 50% to 55% of the tax base.

The second tax rate for selected gambling operators is to be increased from the current 23% to 30%.

The coalition proposes the introduction of a state part of the real estate tax, which should correspond to the amount of the current tax before the application of the local coefficient. The tax would thus newly consist of a part that would be revenue of the state budget (state tax) and a part that would continue to be revenue of the municipal budget (local tax). Municipalities would retain the power to influence the collection of their part of the tax by applying a local coefficient to the local tax. The coefficient would be adjustable from 0.5 to 5 (currently 1.1 to 5). In cases where the municipality has not applied and will not continue to apply the local coefficient, the amendment will effectively double the tax liability.

As most rates have not changed since 2010, it is also planned to introduce automatic indexation of the tax liability by applying an inflation coefficient. This is proposed to be 1 for 2024 and will then be based on the evolution of the consumer price index. 

These measures should bring approximately CZK 9 billion to the state budget in the first year of the amendment's effectiveness. The amendment will be applicable for the calculation of the real estate tax for 2024 if the amendment comes into force by 1 January 2024 (the real estate tax is assessed based on facts as at the first day of the calendar year). 

As part of the simplification of the VAT system, a major reform of VAT rates has been proposed: by merging the two current reduced VAT rates into one of 12%, we should soon have "only" two VAT rates of 12% and 21%. This should result in a lower tax burden on basic goods such as food, housing and medical products, and the government expects savings of CZK 6.3 billion for citizens in this area. The term 'affordable' housing is newly proposed for social housing and shall remain at the reduced (now 12%) VAT rate.

At the same time, the government proposes to completely exempt the supply of books, both printed and electronic, from VAT. In this context, it will now be possible to request a binding assessment from the General Financial Directorate to confirm the exemption for specific supplies of books and similar services. Magazines and newspapers are to remain at the reduced 12% VAT rate. 

According to the government, activities which in its opinion are without demonstrable social or health significance should be moved to the basic VAT rate, e.g. those which were included in the reduced rate due to the COVID-19 pandemic or EET, such as hairdressing services, shoe repairs, collection, and the transport and storage of municipal waste. 

The government proclaims the slogan Let's Raise Taxes on Vices and in line with this approach proposes to increase excise duties on tobacco and alcohol and taxes on gambling. According to estimates, this increase will bring over CZK 10 billion to the state budget.

We would like to remind you that the consolidation package in its current form is awaiting the incorporation of any changes from the comment procedure. According to preliminary information, once approved by the government, the relevant amendments should commence to be discussed in the chamber of deputies in June. In view of the public debate, it can be expected that the package will be amended. We will therefore continue to monitor the legislative process.