Employees – Taxation, Social Security and Health Insurance

The extent of individual’s taxation in the Czech Republic depends on individual’s tax residency status. Czech tax residents are subject to tax on their worldwide income. Czech tax non-residents are subject to tax on Czech-source income only. Tax non-residents are taxed in the same way as residents on their Czech-source income, except for certain types of income.

Czech source income is, for instance, income for work performed in the territory of the Czech Republic, rental income from real estates located in the Czech Republic, etc. In addition, Czech tax non-residents may not qualify for certain tax deductible items and tax reliefs. The term “tax resident” includes any person residing in the Czech Republic for at least 183 days within a calendar year (continuously or over several periods) or having a residence (permanent home)1 in the Czech Republic. If an individual is treated as a tax resident in the Czech Republic and, at the same time in another country, the final tax residency status is to be determined in accordance with the applicable double tax treaty. Czech Republic concluded double tax treaties with nearly all European countries and majority of other developed countries. If there is no double tax treaty in place between the Czech Republic and the other country, double taxation may arise.

INCOME SUBJECT TO TAX

Employment income includes salaries, wages, bonuses, other compensation of a similar nature and most benefits in kind2. 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. On the other hand, travel reimbursement within the Czech labour law statutory limits and various other qualified benefits, such as luncheon vouchers, cultural and social fund benefits, temporary accommodation of up to CZK 3 500 per month (approx. EUR 135) and private life insurance or supplementary pension insurance premiums annually of up to CZK 50 000 (approx. EUR 1 923) may be exempt from taxation if further conditions are met. The tax base for employment income equals the sum of the gross income of the employee. No expenses may be deducted from employment income.

TAX-DEDUCTIBLE ITEMS

The tax base from employment as described above is to be consolidated with all other partial tax bases (i.e. partial tax base from self-employment and business income, from rent, investment income or from other income). The overall tax base can be lowered by tax deductible items such as gifts to charities and other organizations for qualified purposes, mortgage interests, and contributions towards individual’s private life insurance or supplementary pension insurance.

TAX RATE

The employee’s tax liability is computed from the tax base reduced by the above tax base deductions, using the 15 % tax rate. In case the gross income of the employee exceeds annual maximum assessment base for social security contributions, 23 % tax rate applies on employment income exceeding the limit4. For non-residents from countries outside the European economic area with no treaty on exchange of tax related information with the Czech Republic in place, income from dividends, capital gains, interest, royalties and remuneration to members of statutory bodies is subject to 35 % withholding tax rate.

TAX ALLOWANCES

Tax payer may lower the annual tax liability through deduction of tax reliefs. The below tax reliefs, except for the personal tax relief, are available for tax residents and in general, also for Czech tax non-residents who qualify as residents of other member states of the European Union or of the European economic area and their Czech-source income accounts for at least 90 % of their total annual income. The annual personal tax relief is CZK 27 840 (approx. EUR 1 071). In addition, tax relief of CZK 24 840 is granted for a spouse living in the same household with the taxpayer, unless the spouse’s annual income exceeds CZK 68 000 (approx. EUR 2 615). Additional personal tax relief of CZK 2 520 (approx. EUR 97) is granted for partially disabled persons and of CZK 5 040 (approx. EUR 194) for fully disabled persons. Tax relief of CZK 4 020 (approx. EUR 155) is granted to tax payers who are full-time students up to the age of 26 and tax relief of CZK 15 204 (approx. EUR 585) is granted for the first, CZK 19 404 (approx. EUR 746) for the second and CZK 24 204 (approx. EUR 931) for the third and each other dependent child. In addition, parents may apply for tax relief for children visiting the kindergarten of CZK 14 600 (approx. EUR 562) per annum. In case of the taxpayer’s tax liability having been fully covered by tax reliefs, the child tax relief can also be used as a child tax bonus. In this

case, the tax bonus increases employee’s net salary or is paid to the tax payer by the tax authorities. Taxpayers can also claim proportionate amounts of tax reliefs, with the exception of the taxpayer allowance, if the applicable conditions are met for part of the year only.

TAX COLLECTION

The employer is obliged to operate monthly payroll to calculate monthly payroll tax withholding and remit the payroll tax withholding to the tax authorities. If the tax payer has only one employer at each time during the year who does not receive other income above CZK 6 000 (approx. EUR 231) (apart from income that is subject to the final withholding tax, e.g. interests and dividends from the Czech companies), the tax payer is not obliged to file annual tax return. Consequently, the tax payer may ask the employer to perform annual tax reconciliation to apply tax base deductions or tax reliefs that cannot be applied within the monthly payroll (simplified annual tax filing). In other cases, the tax payer is obliged to file annual tax return. The tax return for the respective tax period (calendar year for personal income tax) must be filed with the tax authorities by 1 April of the following year or 1 May of the following year if the tax return is filed electronically. The filing deadline may be extended by additional three months if the tax payer grants a power of attorney to a certified Czech tax adviser, or on the basis of a special application. Another extension of the tax return filing deadline until 1 November of the following year is available if the tax payer has income from abroad.

SOCIAL SECURITY AND HEALTHCARE INSURANCE PREMIUMS

Employment income is subject to social security and healthcare insurance premiums. The assessment base for premium computation is derived from the employment income, where the assessment base is the sum of the income subject to personal income tax. The premium consists of a part to be paid by the employer and a part to be paid by the employee. The payer of the premium is the employer, who withholds the premium from the employee’s monthly income. The employer pays both these parts to the social security and healthcare insurance authorities. The employer pays 24.8 % of the assessment base as a social security premium and 9 % of the assessment base as a healthcare insurance premium; 6.5 % of their assessment base for social security and 4.5 % for healthcare insurance are withheld from employees, members of statutory bodies, and executives. A maximum annual assessment base3 is set for social security premiums. There is no maximum premium set for healthcare insurance contributions. For employees changing employment in the course of the calendar year, or working for several employers simultaneously, the maximum assessment base for social security premiums is calculated for each employer separately. If the amount of the employee’s social security premium exceeds the annual maximum, the employee may claim the return of the surplus after the end of the year. No premium overpayment arises to the employer. Employees coming from another EU country or a country with which the Czech Republic has a bilateral treaty in the area of social security and/or healthcare insurance, may apply for an exemption from premium payment in the Czech Republic. On the basis of such an exemption, employees are not required to contribute to the social security and/or healthcare insurance systems in the Czech Republic, but remain covered by their home social security and healthcare insurance systems. As a member state of the European Union, the Czech Republic is bound by the EU social security regulations (currently applicable to all member states of the European economic area and Switzerland) and other EU law. In addition, to prevent double social security contributions and to assure benefit coverage, the Czech Republic has entered into social security agreements with several non-EU jurisdictions, including Australia, Canada, India, Japan, Korea (South), Russian Federation, or the United States.

ONDŘEJ POLÍVKA

Ernst & Young E-mail: Ondrej.Polivka@cz.ey.com

1 Residence (permanent home) is a place where the payer has a permanent residence, i.e. an apartment which is available to him/her at all times, whether owned by him/her, or rented, and where the payer intends to be staying (depending on his/her personal and family situation). The apartment may be rented to another person, but only in a form enabling the payer its use according to his/her needs. 2 Or in connection with a previous, current or future performance of dependent activity, regardless of whether the activity is carried out for the payer of the income or not. 3 For healthcare insurance premium, as of 1 January 2013, the annual ceiling is no longer applicable. For social security premiums, the annual ceiling amounts to 48-fold average wages; in 2021 it is CZK 1 701 168 (approx. EUR 65 430).