Consolidation package

The Chamber of Deputies approved a tax consolidation package affecting 63 different laws, which aims to significantly reduce the state budget deficit in the coming years.

As the package is not expected to be approved by the Senate and signed by the President, it will come into force on 1 January 2024.

In the following, we mention some important areas that will be affected by the changes:

VAT

The two previously applicable reduced VAT rates of 15% and 10% will be consolidated into one rate of 12%. The basic rate of 21% will remain unchanged. The only exception to the VAT rates will be printed books with less than 50% advertising space. These will not be subject to VAT at all, so their rate will be 0%.

Services and goods that were previously subject to a 10% VAT rate will become 2% more expensive by moving to a 12% rate. This category includes, for example, heat supply, water and sewerage charges, catering and accommodation services, medicines and some pharmaceutical products, admission to cinemas, theatres and other cultural facilities, regular passenger transport and magazines. There has been much discussion about printed newspapers, which were originally intended to move to the 21% rate but will eventually share the tax fate of magazines.

 

For example, cleaning, hairdressing and barbering services, shoe, bicycle and leather goods repairs, and the much-discussed beer, which could be subject to only a 10% VAT rate if certain conditions were met (as part of the provision of a catering service, not as a sale “in a cup across the street”), have been shifted by 11 percentage points, i.e. from 10% to 21%. The pessimists predict that this will contribute substantially to the demise of many pubs, especially village pubs.

Foodstuffs, some pharmaceutical products not previously subject to the 10% rate (such as food supplements purchased from pharmacies), child car seats and funeral services are moving from 15% to 12% VAT.

Soft drinks, cut flowers, firewood and services related to the collection and management of municipal waste will see a relatively high jump from 15% to 21%. It is worth noting that the shift to the standard VAT rate will affect all soft drinks indiscriminately, whether they are unflavoured spring water or sugar-laden energy drinks. The original intention to put demonstrably harmful sugary drinks at a tax disadvantage has therefore somehow missed the mark.

 

Personal income tax

Rates of 15% and 23% remain in force. The higher rate, which has been based on four times the average wage, will be linked to three times only from 2024.

For employees, this means that up to a monthly salary of approx. The 15% rate will be applied to wages of CZK 120,000, and the 23% rate will apply from this amount.

Expressed in annual terms, this is now an amount of CZK 1,935,552, based on a monthly value of CZK 161,269.

The exact amount for 2024 is not known; it will be announced at the beginning of next year by the Czech Statistical Office according to the development of the average wage. If the average wage for 2024 were hypothetically the same as this year, it would be an annual amount of CZK 1,451,664, which would be taxed at a higher rate of 23%.

Certain items deductible from the tax base would be abolished or reduced, which would affect not only sole traders but also the vast majority of employees.

The so-called “nursery fee”, which was intended to compensate for the costs of placing a child in a pre-school establishment and whose maximum amount was linked to one times the minimum wage, is abolished, i.e. CZK 17,300 for 2023.

If one spouse’s income was less than CZK 68,000, not including, for example, parental allowance, the other spouse could claim a tax credit for a dependent of CZK 24,840. From 2024, this tax relief will only be available for a spouse caring for a child under the age of 3.

The student discount, which used to be worth CZK 335 per month or CZK 4 020 per year, has been completely abolished. Thus, students will not benefit from any additional tax advantages.

Furthermore, contributions paid to a trade union will no longer be deductible from the tax base.

Corporate income tax

Corporate income tax is increased from 19% to 21%. Therefore, the 19% rate will be applied for the last time in the VAT return for the calendar year 2023, or for the financial year beginning in that year.

Health, sickness and social insurance

The basis for calculating social insurance for self-employed persons will no longer be based on 25% of average wages, but on 40%, with the reduced basis to be maintained in the first 3 years of business. Thus, the minimum insurance premium will not be CZK 2,944, but will jump to CZK 4,710.

The basis for calculating health and social insurance for self-employed persons has been 50% of the difference between income and expenses, after the new change it will be 55%.

Employees will again be obliged to pay sickness insurance at the rate of 0.6% of gross wages, while the employer’s rate of 2.1% will remain unchanged. This is a compromise so that employees can continue to be reimbursed for the first 3 days of sick leave.

Employee benefits

There were also great discussions between the government and trade unionists over so-called employee benefits, which include, for example, allowances for cultural and sporting needs, recreation, vouchers for the purchase of health care products, over-the-limit meal vouchers, etc. Initially, their tax and levy exemption was to be abolished completely, but a compromise solution was eventually found in the form of capping the exemption at half of the average wage per year. Of course, we do not yet know the average wage for 2023, so we can expect the ceiling to be somewhere around CZK 21,500. Contributions that exceed the threshold will be treated as part of wages and will therefore be subject to health and social insurance contributions as well as personal income tax on employment.

Real estate tax

The tax on immovable property is raised to twice its current value. This tax is to be subject to an automatic indexation mechanism in future years, following the rate of inflation. The higher revenue from this tax was originally to go directly to the state budget, but it was eventually agreed that it would be 100% of municipal revenue.

Excise duties

Excise duty on alcoholic beverages and tobacco products, including alternative cigarettes such as IQOS etc., is increased.

The South Moravian lobby has again managed to prevent the introduction of excise duty on still wine, which will remain the only type of alcohol subject to excise duty, but at a 0% rate.

Taxes on gambling

The tax on roulette and fixed-odds gambling is increased from 23% to 30%. Taxation on lottery betting operators remains at 35%.

A relatively major change is the taxation of lottery and raffle winnings, which were previously up to €1 million. This threshold will now be “only” CZK 50,000.

Other

Entrepreneurs who have purchased and then given away silent wine bearing the company logo or the product or service they offer to their customers and business partners as promotional items on various occasions will be able to do so for the last time by the end of this year. From the New Year onwards, this will no longer be possible.

We are bringing back so-called limit vehicles to the Income Tax Act. M1 category vehicles, i.e. passenger cars, will be able to be reflected in costs/expenses in the form of depreciation only up to the value of CZK 2 million. CZK. Amounts exceeding this limit will thus have to be accounted for as non-tax. Closely related to this is the maximum VAT deduction of CZK 420,000 (21% of CZK 2,000,000).

Exceptional depreciation will only be applicable to new pure electric vehicles.

The price of the vignette for vehicles up to 3.5 t will be increased from CZK 1,500 to CZK 2,300, and an automatic valorisation mechanism will be applied here in the coming years.

The “catastrophe” in the form of taxation of the sale of securities and shares in commercial companies with income above CZK 40 million. Even if the time tests for tax exemption are met, the tax is subtly postponed until 2025.

Employees who also have a company vehicle for private use are charged 1% of the purchase price including VAT of the vehicle, or 0.5% if it is a low-emission vehicle, as part of their salary, with all relevant effects (income tax and health and social security contributions). In 2024, this rate will fall to 0.25% for pure electric vehicles.

Entities that carry out a substantial part of their cash transactions in foreign currencies will be able to legally account in these currencies from 1 January 2024, with this option limited to euros, US dollars and British pounds. The Czech tax administration is not yet fully prepared to administer taxes in a currency other than the Czech currency, so the tax base and tax will have to be converted into Czech crowns and the tax payment will also have to be made in the domestic currency.

In the following year, it will also be possible to exclude unrealised exchange rate differences from the tax base. However, it will be necessary to officially notify the tax authorities of the entry into the regime of not applying unrealised exchange rate differences. Of course, unrealised exchange rate differences can be accounted for even after entering the scheme, but they will then be excluded from tax-effective expenses on the tax return.

Interested in the consolidation package more or looking for expert advice ? Do not hesitate to contact Peter Kchimel.