On 11 May 2023 the country’s government has presented the Czech recovery package. The consolidation package of 58 measures should lead to a reduction in the public budget deficit. In addition to measures in the tax area, the proposed changes mainly affect retirement pensions, unemployment benefits and the salaries of state employees in the Czech Republic. Most of the proposed changes of the Czech recovery package are expected to apply from 1 January 2024. Below is an overview of the most important proposed changes in the tax area.
Corporate income tax
The Czech recovery package would increase the standard income tax rate from the current 19% to 21% and extend the extraordinary depreciation for electric vehicles purchased between 2024 and 2028. Regarding the deductibility of tax costs, the Czech recovery package proposes to introduce a limit for the tax deductibility of costs for acquisition of company cars of category M1 to CZK 2 million (roughly EUR 85,000) from the price of the car. This limit will also limit the increase of the entry price at technical appreciation. The tax deductibility of still wine as an advertising item (gift) up to CZK 500 (roughly EUR 21) would be abolished.
Personal income tax
According to the proposals of the Czech recovery package a progressive tax rate of 23% will apply to monthly income of employees exceeding three times the average wage instead of the current four times. Also a general limit of CZK 50,000 (roughly EUR 2,110) per year for the exemption of other income of the same kind will be introduced.
Several tax exemptions will be abolished, such as:
- discount for a student;
- discount on child placement (the so-called kindergarten fee);
- deduction of expenses for trade union membership fees and examinations verifying the results of further education;
- the exemption from the provision of meals in a non-monetary form (meal vouchers, canteens) above the set limit;
- the exemption of non-cash benefits provided to employees.
Following tax exemptions will be limited:
- exemption of income from the sale of securities or shares in a company upon meeting the time test of possession of three or five years to the amount of CZK 40,000,000 (roughly EUR 1,690,000) per year per taxpayer;
- reduction of the wife/husband discount, which will now only be available to a spouse caring for a child under the age of three years;
- restrictions on the exemption of income from raffles and gambling.
The Czech recovery package would increase the levy burden for self-employed persons by setting the assessment base at 55% of the tax base compared to the current level of 50% of the tax base. Also the minimum assessment base for calculating insurance premiums for self-employed persons would be increased from 25% of the average wage to 40%.
The proposal would reintroduce the health insurance for employees at 0.6% of the assessment base and change the conditions for participation in insurance for employees working under a work performance agreement (DPP).
Value added tax
As part of the simplification of the VAT system the Czech recovery package would align the first and second reduced VAT rates (15% and 10%) into one reduced rate of 12%. Most goods and services currently subject to one of the reduced rates will be subject to the 12% rate under the proposal. However, some items will be reclassified.
In particular, the following are to be subject to the reduced rate of 12%:
- newspapers and magazines;
- selected construction works;
- irregular public bus transport of passengers.
In particular, the following will be reclassified to the basic rate of 21%:
- alcoholic and non-alcoholic beverages with the exception of tap water;
- hairdressing services;
- repair of footwear, clothing and bicycles;
- household cleaning services;
- delivery of cut flowers.
At the same time, the Czech recovery package proposes to introduce a 0% VAT rate on books.
Real estate tax
According to the proposal the real estate tax rates increase up to double and an indexation mechanism will be incorporated to allow the tax to be increased in line with the current inflation.
With the above-detailed Czech recovery package the government aims to reduce the public deficit from 3.5% of GDP this year to 1.8% of GDP in 2024 and 1.2% of GDP in 2025.
If you have any queries about the Czech recovery package or need to adapt to the new rules, the experts and advisors of WTS Alfery, the exclusive representative of WTS Global for the Czech Republic will be happy to provide you with professional support.