DIRECT TAX SYSTEM:
PERSONAL INCOME TAX
(EVIDENCE FROM THE CZECH REPUBLIC)
Taxation – Lecture 4
Content
• Direct tax system in the Czech Republic
• Personal income tax (PIT)
• Social security and health care contributions (SHC)
• Literature
Direct tax system in the Czech Republic
• The system of direct taxes in the Czech Republic is very similar
to other developed European countries.
• Relevant legislation for direct taxes:
 Income tax – act. No 586/1992 Coll.
 Real-estate tax – act. No 338/1992 Coll.
 Real-estate transfer tax – act. No 340/2013 Coll.
 Road tax – act. No 16/1993 Coll.
• The act. No 586/1992 Coll., as amended, Income tax, is divided
into:
 Personal income tax
 Corporate income tax
 Common regulation
Direct tax system in the Czech Republic
Taxes
Direct Taxes
Income Taxes
Personal
Income Tax
Corporate
Income Tax
Property Taxes
Real-estate Tax
Real-estate
Transfer Tax
Road Tax
Indirect Taxes
Personal income tax (PIT)
• The taxpayer of the personal income tax is a person (resident or
nonresident of the Czech Republic).
• The object of the tax is:
 Income from dependent activity (employment)
 Income from self-employment
 Income from capital assets
 Income from rent
 Other income
• Each of these incomes, is described individually and for each of
them it is necessary to calculate so called partial tax base, and
then sum up them to get the tax base.
• Some incomes can be tax-exempt (only several of them will be
mentioned):
 income from the sale of a family house or a flat including the
land related there, if the seller had his residential address
Personal income tax (PIT)
there for at least 2 years immediately before the sale,
 income from the sale of real-estate, flats or non-residential
premises (spaces), if the seller owned that property for at
least 5 years,
 compensations received for damages,
 social welfare benefits, state social support grants,
 state or school stipendium for students,
 rewards paid to donors of blood and other human biological
materials,
 incomes from volunteering,
 alimony payments, etc.
PIT – dependent activity (employ-t)
• Income from dependent activity is every income arising from:
 employment,
 official or membership relationship (the taxpayer in these
relationships must follow employer's instructions),
 rewards paid to members of the authorities of legal entities,
 other incomes similar to these.
• The income is even 1% (but not less than 1 000 CZK) of the input
price of a motor vehicle in each month if the employee can use it
not only for business but for himself too.
• There are several incomes that are not liable to the personal
income tax from dependent activity such as:
 reimbursement of traveling expenses,
 the value of food provided by the employer for employees
who are on a business journey,
 working clothes,
PIT – dependent activity (employ-t)
 items for the purposes of hygiene and work safety, etc.
• There are also some tax-exempt incomes from dependent activity:
 an amount for additional education needed for work,
 the value of food and non-alcoholic beverages (food vouchers),
 employer's contribution to the state-contributory supplementary
pension insurance, etc.
• Every month the employer calculate and withhold advance tax of our
wage (salary). The withhold advance is 15% of sum of the wage
(salary) and social security and health insurance which the
employer has to pay for the employee (gross wage).
• If the employee works on base of signed Agreement on work
performance and his wage is lower than 10 000 CZK/month, the
employer can withhold the „withholding tax“. The withholding tax is
also 15%, but in this case it is calculated only from the wage
(because in this case the employer do not pay social security and
health insurance for the employee).
PIT – dependent activity (employ-t)
• If the taxpayer has incomes only from dependent activity from
one employer, he has no obligation to fill the tax return. He can
ask his employer to fill the annual tax return. It must be submit
before 31st March.
• The employer calculates the tax liability for his employee (using tax
allowances/credits) and decreases his liability by advance taxes or
withholding taxes paid during the tax period.
• The tax rate of personal income tax is 15%.
• The taxpayer can reduce the tax base by tax allowances/credits:
 24 840 CZK/year for each taxpayer (basic tax allowance),
 24 840 CZK/year for a spouse living with the taxpayer in one
household (if the spouses´s own income does not exceed
68 000 CZK in the taxable period),
 2 520 CZK/year for the beneficiary of a partial disability
pension (1st or 2nd stage of disability),
PIT – dependent activity (employ-t)
 5 040 CZK/year for the beneficiary of a full disability pension
(3rd stage of disability),
 16 140 CZK/year for the SPH/H card holder,
 4 020 CZK/year for the student up to 26 years (28 years for
students in doctoral study programms),
 To send child to the kindergarten – 9 900 CZK
 The value of gifts donated for charitable purpose (the total
value of gifts in the taxable period must exceed 2% of the tax
base or 1 000 CZK and the total maximum allowable deduction
shall be 15% of the tax base); as gift for medical purpose is
considered donation of blood or organs (one donation of blood
is assessed for 2 000 CZK, one donation of organ for 20 000
CZK),
 The amount equal to the interest paid in the taxable period on
a loan provided from a housing saving or on a mortgage loan,
PIT – dependent activity (employ-t)
 Contributions to the state-contributory supplementary
pension insurance scheme paid by the taxpayer reduced by
12 000 CZK to the maximum amount of 12 000 CZK,
 Private life insurance premiums paid within the taxable
period to a maximum amount of 12 000 CZK in one taxable
period
 13 404 CZK/year for the first dependent child living with the
taxpayer in one household; 15 804 CZK/year and 17 004
CZK/year for the second and third child respectively.
• This last amount can be used as a tax reduction (up to zero tax duty)
or called tax bonus (minus tax duty, at minimum 100 CZK to
maximum 60 300 CZK in one taxable period).
PIT – private entrepreneur (self-employ-t)
• Incomes from self-employment belongs to the personal income tax.
• Income from dependent activity is every income arising from
employment. It means „I work for somebody else“. On the other hand,
income from self-employment is income from self-employment
business – „I work for myself“.
• Incomes from self-employment are incomes from:
 agriculture production, forestry and fish farming,
 self-employment based on business licence,
 other entrepreneurship except a) and b),
 shares of partners in profits of general commercial partnership
and general partners´ shares in profits of a limited partnership,
 the use or provision of industrial or other intellectual property
and from copyright,
 pursuit of an independent profession,
 activity carried out by a bankruptcy trustee,
PIT – private entrepreneur (self-employ-t)
 income of an expert, an interpreter, an arbitrator,
• Partial tax base for the income from self-employment is created by
the above mentioned incomes reduced by the expenses incurred
to generate, assure and maintain the incomes.
• If the taxpayer does not have enough expenses, he may use lump
sum expenses:
 80 % of income from agricultural production, forestry and
fish farming and from self-employment craftsmanship business,
 60 % of income from self-employment business (other than
craftsmanship),
 40 % of income from other entrepreneurship except those
above (at maximum of 800 000 CZK).
• If the taxpayer:
 has incomes only from self-employment according to a), b)
or c),
PIT – private entrepreneur (self-employ-t)
 and has no employees nor cooperating fellow workers,
 and his income from self-employment from previous 3
consecutively taxable periods does not exceed 5 milion
CZK,
 and he is not a partner in any company,
then tax administrator can determine his tax liability as a lump
amount.
• Income from self-employment can be split between other cooperating
people living in the same household with the taxpayer (spouse,
children).
• The portion for cooperating spouse must be no more than 50% of
total income from self-employment (max. 540 000 CZK per year or 45
000 CZK for a month of cooperation).
• The portion for other cooperating person must be no more than 30%
of total income from self-employment (max. 180 000 CZK per year or
15 000 CZK for a month of cooperation).
PIT – income from capital assets
• Income from capital assets, if it is not the income from employment
and income from self-employment, is:
 profit shares from ownership interest in equity of joint
stock companies, limited liability companies and limited
partnerships, profit shares of membership of a cooperative and
interest and other income from securities holdings
 profit shares of a company,
 profit sharing of the silent partner participating in a
business,
 interest, winnings and other income from deposits on
deposit books, the interest from cash in the account,
 income from the one-time deposit,
 supplementary pension insurance and pension insurance
benefit,
 private life insurance benefit,
 interest and other income from loans, default interest,
PIT – income from capital assets
 interest and other income from holding bills of exchange,
 payments from the trust fund earnings after taxes.
• Above mentioned incomes a)-f), h) and i) generated from sources in
the Czech Republic, have separate tax base for the taxation by
special tax rate (15%).
• If a taxpayer has income only from capital assets generated from
sources in the Czech Republic, he can not use items deductible
from the tax base.
• Above mentioned incomes a)-f) coming from sources abroad, have
partial tax base of personal income tax. Income under e)-f) may be
reported reduced by the relevant expenses.
PIT – income from capital assets
• Example: Determine which of these incomes shall be taxable under
Income from capital assets:
 Mary bought Czech government bonds and she wants to hold
them till maturity.
 John bought CEZ shares in January and sold them 3 weeks
later with income of 5 000 CZK.
 MONEY, joint stock company, that deals with securities trading:
 bought NWT shares in January and sold them in February
with income of 50 000 CZK.
 bought Unipetrol shares 2 years ago, gains dividends and
continue in their possession.
PIT – income from capital assets
• Solution:
 Mary bought Czech government bonds and she wants to hold
them till maturity. – Income from capital assets
 John bought CEZ shares in January and sold them 3 weeks
later with income of 5 000 CZK. – Other income
 MONEY, joint stock company, that deals with securities trading:
 bought NWT shares in January and sold them in February
with income of 50 000 CZK. – Corporate income
 bought Unipetrol shares 2 years ago, gains dividends and
continue in their possession. – Corporate income
PIT – income from rent
• Income from rent, if it is not the income from employment, from selfemployment
and from capital assets, is:
 income from the rent of immovable property or apartments,
 income from the rent of movable property, except for
occasional rent.
• The above described incomes derived from the marital property is
taxed only at one of them.
• The above mentioned incomes of a non-resident are separate tax
base for the taxation of a special tax rate (15%).
• Partial tax base are incomes mentioned above reduced by
expenses incurred to obtain, secure and maintain them.
• If the taxpayer does not apply proven expenses incurred to
generate, ensuring and maintaining income, can claim expenses in
the amount of 30% of the rental income, but only up to the
amount of 600 000 CZK.
PIT – income from rent
• Example: Tom rents a flat to Jerry for a whole year. Tom's rental
income is 10 000 CZK per month. Tom's expenses associated with
the maintenance of the flat is 20 000 CZK per year. What will be the
annual income tax?
PIT – income from rent
• Example: Tom rents a flat to Jerry for a whole year. Tom's rental
income is 10 000 CZK per month. Tom's expenses associated with
the maintenance of the flat is 20 000 CZK per year. What will be the
annual income tax?
• Solution:
Income from rent = 12 x 10 000 = 120 000 CZK
Proven expenses = 20 000 CZK
Expenses by percentage (30% of income) =
120 000 x 0,30 = 36 000 CZK
Tax base = 120 000 – 36 000 = 84 000 CZK
Tax rate = 15 %
Final tax = 84 000 * 0,15 = 12 600 CZK
PIT – other income
• Other income, if it is not the income from employment, from selfemployment,
from capital assets and from rent, is especially:
 income from occasional activities or occasional rent of
movables,
 income from agriculture and forestry and water management,
which are not operated by an entrepreneur,
 winnings from lotteries, betting and other similar games and
prizes of advertising competitions and raffle,
 income from the transfer of participation in limited liability
companies, limited partners to a limited partnership or a
cooperative share transfer,
 income from an inherited rights to industrial and intellectual
property, including copyrights, etc.
• There are some tax-exempt incomes:
 income from occasional activities or occasional rent of
movables if the sum up of these incomes do not exceed the
PIT – other income
amount of 30 000 CZK in a taxable period,
 income from beekeeping if there are no more than 60 hives
and the income do not exceed the amount of 500 CZK per hive
in a taxable period,
 income from sales of securities and from shares pertaining
to a participation certificate when canceling mutual fund, if their
sum does not exceed the amount of 100 000 CZK in a taxable
period.
• Gratuitous income (gifts) can be tax-exempt, if it is obtained
from:
 relative in a straight line (children, parents, grandparents,
grandchildren) and the secondary line (siblings, uncle, aunt,
nephew or niece, spouse, spouse of my child, child of my
spouse, parents of my spouse or spouse of my parent),
 the person with whom the taxpayer has lived for at least 1
year before obtaining gratuitous income in joint household,
PIT – other income
 acquired on occasion provided their value does not reach
15 000 CZK.
Partial tax base is income minus expenses provably incurred to
achieve it. If the expenses are greater than income, than partial
tax base is equal to 0.
PIT – other income
• Example: Determine which of these incomes shall be taxable under
other income and which of these could be tax-exempt:
 Tomas Berdych (Czech resident) won Davis Cup and received
200 000 000 CZK.
 Harry won 20 000 CZK in a lottery.
 John is a beekeeper. He has 20 hives and his income is 15 000
CZK in a taxable period.
 Margot inherited a car from her grandfather in cost of 240 000
CZK.
 Bonnie clean up her old neighbor´s house 4 times per year and
she receives 10 000 CZK.
PIT – other income
• Solution: Determine which of these incomes shall be taxable under
other income and which of these could be tax-exempt:
 Tomas Berdych (Czech resident) won Davis Cup and received
CZK 200 000 000. – Income from self-employment
 Harry won CZK 20 000 in a lottery. – Other income
 John is a beekeeper. He has 20 hives and his income is CZK
15 000 in a taxable period. – Other income (it cannot be taxexempt,
because his income is 750 CZK per a hive)
 Margot inherited a car from her grandfather in cost of
CZK 240 000. – Tax-exempt other income
 Bonnie clean up her old neighbor´s house 4 times per year and
she receives CZK 10 000. – Tax-exempt other income
Social security and health care
contributions (SHC)
• Not only high taxes but especially high social security and health
contributions are the worst problem that Czech entrepreneurs
have.
• Czech or foreign employers or Czech branch offices of foreign
employers, all foreigners who work for a Czech employer or are
on the payroll of a branch office of a foreign company participate
in the Czech Republic social security system.
• Most Czech legal entities must also make a contribution to an
insurance fund for work-related accidents and illness.
• The assessment base of social security for employee is sum up
of his income (income that is subjected of the personal income tax).
The assessment base of health insurance is his partial tax base
for the income from dependent activity.
• The assessment base of social security and health insurance for
employer is sum up of assessment bases of his employees.
Social security and health care
contributions (SHC)
• The assessment base of social security for the self-employed
person is the amount he choose (at least his partial tax base for the
income from self-employment). The assessment base of health
insurance is his partial tax base for the income from self-
employment.
Table of social security and health insurance rates in the Czech Republic in 2016
Employer
(%)
Employee
(%)
Total (%)
Self-
employed
persons (%)
Health
insurance
9,0 4,5 13,5 13,5
Social
security
25,0 6,5 31,5 29,2
Pension 21,5 6,5 28,0 28,0
Sickness 2,3 0 2,3 0
Unemployme
nt
1,2 0 1,2 1,2
Total 34,0 11,0 45,0 42,7
Social security and health care
contributions (SHC)
• The self-employed person must submit annual return for Social
Security Institution and Health Insurance Company before 31st
March. If the taxpayer has a tax adviser (agent) the annual return
could be filled by the 30th June.
• In this return he calculates how much he must pay for his social
security and health insurance for the previous year. Every selfemployed
person must pay monthly allowances. After
substracting allowances he must either pay up the difference or
the institutions will return excess of his payments.
Literature
• MCGEE, Robert W. The philosophy of taxation and public finance.
Boston: Kluwer Academic Publishers, 2004. viii, 313.
ISBN 1402077165.
• RADVAN, Michal. Czech Tax Law - 3rd ed. 3. vyd. Brno: Masarykova
univerzita, 2010. 65 s. Fac. of Law Publ. no. 4 (Edition of textbooks).
ISBN 978-80-210-5269-7