The following article provides a brief overview of the determination of personal income and the resulting taxation under the tax laws of the Czech Republic. The insights provided focus on the taxation of employment income, including the various related elements, remuneration paid to directors and members of statutory bodies, capital gains, dividends and interest, as well as rental income.
Taxation of taxable income on cash basis
In the Czech Republic, resident individuals are generally taxed according to the basic cash principle, with a few exceptions provided for by law. According to this principle, only income actually received between 1/1 and 31/12 becomes taxable.
Taxation of Employment Income
The taxable income of employees includes all wages, salaries and bonuses paid and benefits in kind (so-called fringe benefits) received in return for work performed. These benefits are valued, in principle, according to the ‘market value’ method. Some particular cases concern:
- cars provided by the employer to employees for mixed use (professional and private), for which the fixed rate of 12% per year of the purchase price applies;
- travel expenses in excess of the legal limits (not particularly high, although constantly adjusted for cost of living), the reimbursement of which is to be considered fully as part of taxable income;
In addition to these, there are benefits defined as ‘non-monetary’, including:
- those that may be granted for education, sports and health, which have a ‘non-taxability’ exemption of CZK 21,983 for 2024, although the exemption only results if certain specific conditions set out in the Act are met;
- accommodation provided by the employer, whether temporary or not, is not taxable up to the conventional rent of CZK 3,500 per month, provided that there is a regular lease agreement in compliance with non-tax rules. Differently, the accommodation allowance paid to the employee as a cash per diem is fully taxable;
- cash meal allowance in substitution of meal vouchers or company canteen service is exempt from tax up to the limit of CZK 115.50 per work shift (limit set for 2024).
Remuneration intended and actually paid by Czech entities to directors and other members of statutory bodies who are tax residents in the Czech Republic is taxed according to the rules for employees’ salaries. Thus, theoretically, a director who receives only his income as a director or member of a statutory body is not required to file an annual tax return (in Czech DPFO) with the competent office. However, both resident and non-resident directors of EU Member States and other countries of the European Economic Area may still voluntarily file tax returns in order to take advantage of their personal tax deductions.
Conversely, remuneration paid to directors and members of other statutory bodies not resident in the Czech Republic is subject to a withholding tax at different rates: for residents of the European Union, the European Economic Area (EEA) or a DTT country (or a country with which the Czech Republic has entered into an agreement on the exchange of tax information) the rate is 15%, and for other countries not previously considered 35%.
No further taxes are due in the Czech Republic on this income. Double tax treaties regulate the case of possible ‘cumulation’ of income in the state of tax residence.
Miscellaneous Income: assets and real estate capital gains
In the Czech Republic there is no separate tax on capital gains. Amounts received in this capacity constitute income that simply forms part of the overall tax base of gross individual income, subject to the two progressive PIT rates (15% and 23%) depending on the corresponding income bracket.
However, the legislation provides for several special cases of exemption from capital gains taxation, which mainly derive from the period of ownership. More precisely, capital gains related to the purchase and sale of assets and real estate are exempt if the possession by the individual exceeds the time limits specified by law:
- Three years for direct ownership of securities (such as shares in an a.s.) and five years for shares in other companies not represented by securities, such as shares in a limited liability company (s.r.o.). The recent ‘tax package’ introduced, as of the financial year 2025, a specific limitation of the exemption through an annual cap on gross proceeds (i.e. the proceeds of any securities sold) of CZK 40 million. As a result of this rule, proceeds received (excluding capital gains) in excess of the cap will be subject to normal progressive two-rate taxation. In addition, the tax exemption of gross proceeds from the sale of shares below CZK 100,000 per taxable period was confirmed.
- Two years prior to the date of the transfer contract for real estate used as a personal residence (so-called ‘first home’), provided that it is actually where the transferor lives.
- Five years prior to the date of the contract of sale for real estate not of personal residence that was acquired by the seller before 1/1/2021.
- Ten years prior to the date of the contract of sale for real estate other than personal residence that was acquired after 1/1/2021.
- One year for motor vehicles, motorbikes, works of art (paintings, statues, etc.), collector’s items, ships and aircraft.
It should be noted that the exemptions detailed above are only applicable to capital gains realised on assets that do not form part of the business assets of the individual acting as a sole entrepreneur. Capital gains on assets of an entrepreneurial (business and/or professional) nature are taxed according to the same taxability criteria that apply to corporate income.
Capital income: dividends and interest
Investment income including dividends paid by corporations, returns on securities issued by corporations, and interest received for any reason on assets held personally and not as a business, is financial income to be treated as taxable income and generally treated as part of the total annual tax base, subject to the normal PIT rates.
Dividends, returns and interest paid by a Czech resident entity to a Czech tax resident taxpayer are all subject to a 15% withholding tax. The same withholding tax rate also applies to capital income paid to persons residing in EU/EEA states or in a state that has concluded a DTT or a tax information exchange agreement with the Czech Republic. In other cases, the tax rate for this type of income is 35%. However, double tax treaties may limit or eliminate withholding taxes in the exchange of transnational capital income.
The only exception to the principle of being subject to the ordinary PIT rates concerns capital income from dividends and interest that a Czech resident taxpayer receives from foreign entities: these may be included in a separate specific tax base, subject to a fixed rate of 15%.
Rental income
Revenue from the collection of rental income from real estate, as well as rental fees from movable property, is another subgroup of the total taxable income on which the progressive rates of 15% and 23% are to be applied.
In determining the tax base, the taxpayer may deduct allowable expenses by adopting an analytical “footnote” method, or opt for the flat deduction scheme, corresponding to 30 percent of income. This option is subject to a maximum deductibility limit set at CZK 600,000 per year, applicable indiscriminately to both deduction methods.
Prepared by Savino & Partners a.s., based on source PWC Czech Republic, February 2024.
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