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At the end of September last year, the Czech Republic’s public debt reached SEK 3,115 billion, a quarterly increase of SEK 220 billion and a doubling of the 2019 figure. It has to be said, that the Czech Republic maintains one of the lowest public debts in the European Union, still ranking 20th among European states.

As previously announced by the Fiala government at the end of 2023, 58 measures with staggered implementation over the two-year period 2024-2025 have been outlined and formalised to deal with this significant increase, with an estimated budgetary impact of SEK 147.5 billion.

The changes mainly concern three areas: VAT rates and deductions, taxes and changes to the Accounting Act. Below are the insights on each aspect.

VAT, new rates and deductions

The value-added tax component of the reform sees the transition from the three previous rates to a single simplified reduced rate: in addition to the base rate, which remains at 21%, the two reduced rates of 15% and 10% are thus merged into a single one corresponding to 12%. This transition is, of course, accompanied by a series of changes with regard to the categories of goods, in detail:

  • 10% to 0% (exemption): books, brochures, leaflets, picture books, drawing books, colouring books, music books and map products;
  • 15% to 12%: foodstuffs (but not beverages, except tap water, milk and milk substitute drinks), medicines, pharmaceuticals and medical devices, contact lenses, newspapers, magazines and periodicals
  • 10% to 12%: accommodation services, supply, water, sewerage, heating
  • 10% to 21%: draught beer, cleaning work in the home, repair of shoes, leather goods and bicycles, hairdressing and sauna services
  • 15% to 21%: beverages, firewood, cut flowers, collection, transport, landfilling of municipal waste, import of works of art, collectors’ items and antiques

The second part of the VAT amendment deals with the deductibility of motor vehicles of category M1, i.e. with a maximum of eight seats in addition to the driver’s seat. Cars are included in the 2nd depreciation group and the depreciation period is set at 5 years by default.

The change concerns both the deductibility at purchase, with the deductible value set at 2,000,000 crowns including any technical improvements, and the deductible amount for VAT purposes, with a ceiling of 420,000 crowns (21% of 2 million)

The limitations apply if the purchase constitutes a long-term asset for the taxpayer. On the other hand, they do not apply to ambulances or funeral cars, vehicles purchased for the operation of motorised road transport under concession, or leasing companies leasing cars to third parties.

Income tax

Income tax is at the centre of the tax reform, being subject to changes in several of its aspects and concerning the different subjects affected:

Legal Persons

Legal entities first see the rate rise by two percentage points, from the previous 19% to 21%.

A novelty that deserves special analysis is the introduction of the regime for the exclusion of unrealised exchange rate differences: they may be counted and thus included in the tax base for tax purposes at the time of realisation. Accounting units that are not in simple accounting and are not subject to insolvency or liquidation proceedings are eligible for the new regime. These can then access it by means of an accession notification within 3 months from the beginning of the relevant tax period (limit extended to 1 April if it is the current tax year).

Changes were also made to the depreciation of M1 category vehicles, which, as already mentioned, will only be deductible up to a value of CZK 2,000,000 including technical improvements. On the other hand, the possibility of taking advantage of extraordinary depreciation for electric (emission-free) cars has been introduced. The latter can be depreciated up to 60% of their purchase cost for the first 12 months and up to 40% for the entire following year.

Lastly, the tax deductibility of still wine for representation purposes, hitherto set at a ceiling of 500czk, was abolished.

Natural persons

The tax tightening also involves personal income tax, with changes introduced over different time horizons over the two-year period.

As of 01/01/2024, the tax base for calculating the rate has been reduced from 4 to 3 times the average monthly salary. The rates of 15% and 23% remain unchanged. As a result, the maximum amount subject to tax at the reduced rate increases from over CZK 161,000 to CZK 131,901, leading to an increase in the share of income taxed at 23%.

As of 01/01/2024, a further change was introduced concerning the employee’s share of social security contributions, which increased from 6.5% to 7.1%. At the same time, the purchase value deduction for zero-emission vehicles used for private and business purposes was reduced.

As of 01/07/2024, new rules for the payment of contributions for employees working on the basis of PLR agreements will come into force. Payment will be mandatory if the sum of PLR earnings exceeds 25% of the average salary from a single employer and 40% if there are several employers. In the latter case, the employee will also be liable for the 7.1% social security contribution mentioned above.

As of 01/01/2025, proceeds from the sale of securities and units within the same corporate group will be exempt up to CZK 40 million, provided they have been held for at least 3 years for securities and 5 years for units. In case of non-exemption, the market cost as at 31.12.2024 will determine the purchase value, instead of the historical cost.

These major changes are accompanied by a number of minor changes, which are listed below:

  1. Dependent spouse deduction applicable if there is cohabitation, the child is under three years old and the spouse’s income does not exceed CZK 68,000
  2. Abolition of the student tax discount
  3. Limitation of exemption for certain non-monetary employee benefits
  4. Abolition of the kindergarten tax discount for dependent children
  5. Abolition of tax base reduction for trade union membership fees and continuing education

Individual entrepreneurs and the flat-rate scheme

Self-employed professionals will face a 5% increase in the calculation basis for tax, from 50% to 55%. At the same time, the minimum monthly payments for social security and health insurance will be significantly increased: the former will rise from CZK 2,944 to CZK 3,852, while the latter will increase by only CZK 246 from the previous amount of CZK 2,722.

Self-employed traders who have opted for the flat-rate tax system must maintain an annual income of less than CZK 2,000,000 by 10/01 this year. The three bands of all-inclusive advance payments have been redefined as follows:

  • CZK 7,498 for the first bracket
  • CZK 16,745 for the second
  • CZK 27,139 for the third

Real Estate tax

The Real Estate tax is the subject of a balanced revision with three main aspects:

  1. Average year-on-year increase of 1.8%
  2. Introduction of the inflation coefficient as of 2025
  3. Choice of local coefficient by municipalities, between 0.5 and 5

The increase in this tax is at the centre of wider discussions concerning the effects of tax increases. An in-depth analysis of the impact of these changes was presented in the article at the link below: Real Estate Tax Impact.

Accounting Law

The current amendment, which is not expected to be completed until 2026 at the earliest, is already starting to show its first tangible effects. Starting this year, it will be possible to issue invoices in euros, US dollars or sterling. This represents a significant advantage for all those whose functional currency differs from the Czech koruna. Despite the benefits for certain categories of companies, the choice entails risks and challenges related to its irreversibility and the need to maintain tax declarations and VAT obligations in the local currency.

Another change concerns the redefinition of the concept of net turnover, in line with the provisions of the EU Directive, which also has a significant impact on the concept of revenue. As a direct consequence of this change, certain companies subject to certification will be exempted from the previously applicable obligation. Finally, the regulations concerning the Sustainability Note, which until now was only required for large companies, have been extended. These companies must demonstrate through special reports that they comply with specific sustainability standards, which could influence their access to credit on more favourable terms in the future.

Source: https://www.camic.cz/it/, https://www.mfcr.cz/cs

Image source: https://www.marca.com/

Graphic source: https://storyset.com/

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