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Dear Clients and Business Friends,
A number of changes in tax and related legislation came into effect on 1 January 2021. Please find a summary of the most important changes in this newsletter.
1 TAX PACKAGE
Cancellation of the Super-Gross Wage and Solidarity Tax Surcharge
The tax base of employees changes starting January 2021. Their tax base will now be constituted exclusively by income (rather than the total of income and the mandatory insurance premium paid by the employer, the “super-gross wage”, as the case was until now). Tax burden of employees will thus be reduced by an average of 25%.
Tax rates have also changed. The existing basic tax rate applicable to income of natural persons remains at 15%, but the 7% solidarity tax surcharge has been cancelled and replaced with the second tax rate at 23%, which will apply to a tax base exceeding 48 times the average wage, which is CZK 1,701,168 annually or CZK 141,764 monthly in 2021. Unlike the solidarity tax surcharge that only applied to income from employment and business, the 23% tax rate will be applied to the total of all income (i.e. including income from capital assets, leases and other income).
Tax Relieves for Natural Persons
All natural persons will benefit from an increase in the basic taxpayer’s relief from CZK 24,840 to CZK 27,840 and CZK 30,840 in 2021 and 2022, respectively. The tax bonus (the amount of a tax relief for dependent children, which exceeds the taxpayer’s tax liability and which is paid by the state to parents with reference to the number of their dependent children) will no longer be limited because the previous threshold in the amount of CZK 60,500 was cancelled.
The Limit for Exemption of Income from the Sale of Securities was not Approved
For sake of completeness we wish to inform you that the threshold for exemption of natural persons’ income from the sale of securities in the amount of CZK 20,000,000, which was proposed during discussions in the House of Representatives, was not approved. The existing regime will thus apply to income of natural persons from the sale of securities, i.e. where the period of time between the securities’ acquisition and sale is greater than three years, the income is completely exempt.
Cash Meal Contribution
Employers can provide their employees also with a cash meal contribution under conditions advantageous from a tax perspective since 1 January 2021. The cash meal contribution is an alternative to the existing methods where only provision of catering to employees in other than monetary form, which included meal tickets, was subject to tax relieves until the end of 2020. Both forms will now enjoy treatment advantageous in tax terms, but in two different ways:
If the employer provides employees with meal tickets, the whole value of the meal ticket is subject to zero taxation with the employee irrespective of the nominal value, while only 55% of the meal ticket’s value is tax deductible on the employer’s side, but no greater than 70% of the meal allowance for a business trip taking from 5 to 12 hours (this threshold is CZK 75.60 in 2021). In case of a cash catering contribution, the entire amount will be tax deductible for the employer, while the amount exempt from taxation for the employee will be 70% of the meal allowance (CZK 75.60 in 2021) as a maximum. If the employer provides a higher cash contribution, the amount in excess of the above-provided threshold will be taxed in the same way as the wage, i.e. including social security and healthcare insurance deductions.
The conditions applicable to the cash meal contribution must be identical with those applicable to meal tickets. The cash meal contribution can be recognised as a tax expense, if the employee is present at work for at least three hours during the specified shift. Shifts worked and exempt income still need to be registered in payroll documentation.
Amortisation of Intangible Assets
Accounting amortisation charges will now be effective for tax purposes in relation to intangible assets. The existing procedure specified in the Income Tax Act that set forth a threshold for tax purposes together with a binding method of intangible assets’ amortisation, was cancelled. Accounting amortisation charges will now apply also to determination of the tax base. This regime can be applied as early as to intangible assets acquired on or after 1 January 2020.
An Increase in the Input Price of Tangible Assets and Technical Improvements Thereof
The threshold for tangible assets, for which the minimum depreciation period for tax purposes is determined by the Income Tax Act, is being increased from CZK 40,000 to CZK 80,000. The threshold for technical improvements on tangible assets is also being increased to that amount. This regime can also be applied as early as to tangible assets acquired on or after 1 January 2020.
Introduction of Extraordinary Accelerated Depreciation of Tangible Assets
In order to support investment activities, the option of extraordinary depreciation of tangible assets was re-introduced with respect to assets from the 1st and 2nd depreciation group acquired from 1 January 2020 through 31 December 2021. The extraordinary depreciation charges can only be applied by the first owner of the relevant assets. A taxpayer will be able to depreciate assets classified in the 1st and 2nd depreciation group over 12 months and 24 months, respectively, by applying depreciation charges up to 60% of the input price for the first 12 months and at the remaining 40% for the next 12 months. This measure results in a substantially shorter period of time when it is possible to charge the assets’ acquisition cost into tax expenses.
Reporting of Non-taxable Income to Other Countries
In addition, the amendment softened the rules applicable to reporting income, which is tax exempt in the Czech Republic or which is not taxed in the Czech Republic under the Double Taxation Treaty, paid to foreign countries. Under the existing legislation, taxpayers were obliged to notify the tax administrator about income paid to foreign countries on a monthly basis. This report will now be submitted annually by 31 January of the following year and only if the total value of income of the same kind exceeds CZK 300,000 in the concerned month, which usually applies to the following income: dividends, licence charges, loan interest, and income from services provided in the territory of the Czech Republic. The duty to report does not apply to income reported in compliance with the Act on International Cooperation in Tax Administration (e.g. DAC 6).
Presentation of Financial Statements
The changes also include a new possibility to publish financial statements in the Collection of Deeds through the corporate income tax return. This procedure can be used in relation to financial statements for 2021 for the first time.
2 FLAT-RATE TAX FOR SELF-EMPLOYED PERSONS
The area of applying flat-rate taxes by self-employed persons dramatically changes in 2021. The existing “tax determined as a lump sum”, which used to be annually agreed between the taxpayer and the Tax Office on a case-by-case basis, is replaced with a “flat-rate tax” identical for everybody.
The flat-rate tax is CZK 5,469 a month in 2021. The name “flat-rate tax” is misleading because it includes (i) income tax in the amount of CZK 100; (ii) healthcare insurance in the amount of CZK 2,393; and (iii) pension insurance in the amount of CZK 2,976. The obligation to make relevant payments to the Tax Office, a healthcare insurance company and the Social Security Administration Authority will thus be complied with by the single payment to the Tax Office’s account. Business persons in the flat-rate tax regime do not file any tax return or income and expense schedules at the end of the year and inspections should only focus on their compliance with the flat-rate tax rules.
While the main objective of the flat-rate tax’s introduction is to make business persons’ life easier by reducing the paperwork, our calculations show that the flat-rate tax regime is more favourable than the standard regime in many cases. Assessment of benefits depends on many factors such as the level of income and expenses or the applied expense lump sum, whether the business constitutes the taxpayer’s main or secondary activity, what deductions from the tax base and tax relieves the taxpayer is entitled to exercise, etc.
Application of the flat-rate tax procedure is the taxpayer’s choice. If a business person wishes to apply for the flat-rate tax regime, he or she must inform the tax administrator with the territorial competence by 11 January at the latest. The application is filed on a form issued by the Ministry of Finance. The flat-rate tax is paid each calendar month by the 20th day of the relevant month.
Several conditions have to be met in order to enter the flat-rate tax regime, the major ones being the amount of the taxpayer’s income from self-employment below CZK 1,000,000 in the previous taxation period, and the taxpayer not being a VAT payer and having no income from a dependent activity (with the exception of income taxed with a withholding tax).
After the end of the taxation period, the taxpayer is obliged to assess whether he or she complied with the flat-rate tax regime’s conditions in the particular period. If not (for example the taxpayer received lease income above CZK 15,000), the taxpayer is obliged to file a tax return and income and expense schedules and quantify tax and insurance premium in the standard way.
3 MINIMUM WAGE FOR 2021
Since 1 January 2021, the minimum wage has been increased to CZK 15,200 from the previous CZK 14,600, reaching 42.4% of the average wage. The minimum hourly wage amounts to CZK 90.50 in 2021 (compared to CZK 87.30 in 2020).
4 TRAVEL REIMBURSEMENTS
The rates applicable to basic reimbursements for two-wheeled vehicles and three-wheelers, and for passenger road motor vehicles change to CZK 1.20 per km and CZK 4.40 per km, respectively, in 2021. At the same time, average prices of fuels are modified.
The meal allowance for local business trips increases as follows in 2021:
• A minimum of CZK 91, if the business trip takes from 5 up to 12 hours;
• A minimum of CZK 138, if the business trip takes more than 12 hours but less than 18 hours; and
• A minimum of CZK 217, if the business trip takes more than 18 hours.
Regulation No. 510/2020 Coll. sets forth rates applicable to foreign meal allowances in 2021. Compared to 2020, the meal allowance rate is increased for example with respect to Bulgaria, Slovenia and Sweden.
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We hope that the information in our newsletter was useful for you and are ready to help you in finding a solution to any situation you may be in.
Your LTA Team