SCOPE

Individuals with permanent residence status or individuals with foreign permanent residence who are physically present in the Czech Republic for 183 days or more in a calendar year are considered Czech resident for tax purposes. Such residents are generally subject to income tax on their worldwide income.

Individuals who spend less than 183 days in a calendar year in the Czech Republic and who do not have permanent residence or domicile here are considered tax non-residents. Such individuals are taxed on their Czech-source income only, subject to the provisions of double taxation treaties. An individualïs Czech tax residence status may be effected by the provisions of an applicable double taxation treaty.

Taxpayers who spend less than 183 days in the Czech Republic and receive an income from dependent activities from a foreign employer which does not have a permanent establishment in the Czech Republic are generally exempt from Czech personal income tax on such income. However, under certain specific circumstances, such taxpayers may be deemed to be employees of a local entity and consequently taxed on their income received from employment, however long they spend in the Czech Republic.

"Foreign expert" status An individual who has permanent residence outside the Czech Republic, and who is sent here by a foreign entity as an expert with specific knowledge for the purpose of providing assistance to a Czech resident entity or permanent establishment is regarded as a "foreign expert" under Czech tax law.

"Foreign experts" are taxed as non-residents, regardless of the length of time they spend in the Czech Republic. They are taxed in the Czech Republic only on their Czech-source income, if their reason for being in the Czech Republic is exclusively to provide expert assistance. Before 1997 individuals received certain tax free allowances against their employment income, but this was abolished with effect from 1 January 1997.

RATES

The following rates apply to both residents and non-residents in 1997:

TAXABLE INCOME (Kc)                         TAX

      0 -  84,000       15%
 84,000 - 168,000       12,600 Kc + 20% of the amount over 84,000 Kc
168,000 - 252,000       29,400 Kc + 25% of the amount over 168,000 Kc
252,000 - 756,000       50,400 Kc + 32% of the amount over 252,000 Kc
756,000 and over       211,680 Kc + 40% of the amount over 756,000 Kc

SOCIAL SECURITY

Persons employed under Czech law by registered Czech employers (including branch offices of foreign companies) are generally obliged to make health and social security contributions amounting to 12.5% of gross income.

DEDUCTIONS, EXEMPTIONS

Czech tax residents are generally entitled to a personal deduction of 28,800 Kc, with additional allowances of 16,800 Kc for a spouse with annual income under 28,800 Kc and 14,400 Kc for each dependent child.

Mandatory social security contributions paid in either the Czech Republic or abroad by employees are deductible from taxable income. Charitable contributions up to 10 % of the tax base may also be deducted.

CAPITAL GAINS

No distinction is made between ordinary income and capital gains. However, gains on the sales of most capital assets are exempt if the asset is kept for a specified period of time (e.g. if securities acquired after 1 January 1997 are held for more than six months, securities acquired before 1 January 1997 for more than three months or a shareholding in a limited liability company for more than 5 years). There are some antiavoidance rules concerning securities acquired through conversion of investments in other legal entities.

RETURNS AND PAYMENTS

All individuals are required to file tax returns unless one of the following criteria applies:

  • Their total annual taxable income is less than 10,000 Kc
  • All taxable income is from employment, and is paid by a Czech legal entity or a registered establishment of a foreign entity in the Republic, or from employment carried out abroad.
  • All their earnings are from "special" categories of income (e.g. tax exempt income and income subject to special rates of withholding such as dividends and interest).

Returns for each calendar year are due by 31 March of the following year, although this may be extended to 30 June if the return is prepared by a qualified tax adviser. Payment is due within the above deadlines, although monthly, quarterly or semi-annual prepayments throughout the tax year may also be required, based on prior year tax liability.

The content of this article is intended to provide a general guide to the subject matter. It is therefore not a substitute for specialist advice.

For further information contact Paul Antrobus or Richard Fletcher, Arthur Andersen Prague, tel +420 2 2440 1300 or enter a text search 'Arthur Andersen' and 'Business Monitor'.