Legal regulation

The Czech Income Taxes Act No.586/1992 Coll. covers taxation of individuals and legal entities. The taxation of individuals depends primarily on their residence status. Natural persons who have either their home address in the Czech Republic or stay in the Czech Republic for at least 183 days in the relevant calendar year are regarded as Czech tax residents.

Czech tax residents

Czech tax residents are subjected to tax on their worldwide income regardless of where it is received.
Czech tax non-residents
Tax non-residents are liable to Czech income tax on Czech source income only. Income is regarded as arising in the Czech Republic if it is from:
- Work carried out in the Czech Republic
- Activities carried out through a permanent establishment located in the Czech Republic
- Business, technical or other consultancy services and similar activities, provided in the Czech Republic
- Rental income, capital gains, dividends and other income.

Tax Base

The tax base for income from employment is a so-called super gross wage (a gross wage increased by the amount corresponding to social insurance and general health insurance, which is paid from the said income by the employer).
The tax base for income acquired by business activities is the difference between revenues and expenses. In some cases it is possible to calculate expenses using the determined percentage (from 40 to 80 percent). Then it is not necessary to prove the real expenses to the tax administrator.

Tax rate, Tax return

For the year 2008 a flat tax rate for income from employment of 15 % is valid in the Czech Republic and starting 2009 a flat tax rate of only 12,5% will be applied.
Business, rent and other personal income is usually taxed via filing a Czech personal income tax return in which the respective income is declared. In principle, taxpayers are allowed to reduce their taxable income by related expenses and apply the respective tax exemptions stipulated in the Double Tax Treaties.
Some types of income are subject to a final withholding tax and, therefore are not included in the tax return.

Avoidance of double taxation

Up to date, the Czech Republic has concluded about 70 Double Taxation Treaties (=DTT) which closely follow the wording of the OECD Model Tax Convention. DTT can reduce also the withholding tax rate applicable to Czech non-residents´ income from Czech sources and they stipulate the method for the avoidance of double taxation to be used with respect to particular types of income (exemption or simple credit methods).
If no DTT has been concluded between the Czech Republic and the respective country, the Czech sourced income of foreign tax residents will be subject to Czech taxation according to domestic Czech tax legislation.

Specific rule “Economic employer”

An economic employer is a Czech employer that has foreign individuals working for it without a Czech employment contract. Such individuals are typically employer by a foreign company. In such cases, the economic employer is obliged to act as a payroll agent and must transfer the appropriate income payments to the Financial Authority.
 

Ditta Hlavackova
Tax Advisor and Partner

HLB PROXY
Audit & Tax Services

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