Czech Republic: Budget-deficit-cutting package 2013

The Czech government has adopted another preliminary plan for making further tax changes in relation to reducing public budget deficits to be effective from 2013.

A package with similar changes described in our Tax News article dated 16 May 2012 was previously rejected by the Senate and the ruling coalition was unable to get the necessary votes in the Chamber of Deputies to override the rejection. Some personal income tax changes shall be valid only temporarily for three years, i.e. from 2013 to 2015. The measures will significantly increase tax costs, especially for employers and employees.

Amendments to flat-charge expense deductions.
The absolute amount of the flat-charge deduction for sole traders applying the deduction of 40% (eg auditors, attorneys-at-law, tax advisors) shall be limited to CZK 800,000 (approx. EUR 32,000). The 30% flat-charge expense deduction applicable to lease income shall be limited to a maximum amount of CZK 600,000 (approx. EUR 24,000). When applying the flat-charge expense deduction, it shall not be possible to use the child allowance or sole earner deduction under certain conditions.

Introduction of solidarity tax.
In respect of personal income taxes from dependent activities and income from entrepreneurial activities, a solidarity tax (in addition to the standard income tax) shall be introduced at a rate of 7% applied to the annual tax base exceeding the 48 multiple of the average salary for social security purposes (at present, the 48 multiple of the average salary is CZK 1,206,576, i.e. approx. EUR 48,000). Taxpayers subject to the solidarity tax increase would have to file a tax return.

Increase of withholding tax on dividends, interest and royalties.
According to the current version of the Czech Income Tax Act, a withholding tax of 15% applies to payments to foreign tax residents. It is proposed to increase the withholding tax rate to 35%. However, this rate shall apply only to residents of states that are not EU tax residents or with which the Czech Republic has not concluded a double tax treaty or a contract for the exchange of tax information.

Amendments to social security charges.
It is proposed to cancel the cap for health insurance deductions both for employees and employers.

Increase of real estate transfer tax.
The real estate transfer tax is proposed to be increased from 3% to 4%.

VAT changes.
During September, the Amendment to the VAT Act, which was expected to increase current VAT rates (14%, 20%) by 1% with effect from January 2013, was rejected. A new draft amendment was submitted which will have to go through the entire legislative process (Parliament, Senate, President). There is an alternative proposal promoting the maintenance of VAT rates at the present level. Simultaneously, a single VAT rate of 17.5% is being considered. During further negotiations it will become clear which draft amendment will have preference in the end. If no proposal is accepted, then as of January 1, 2013 a single VAT rate of 17.5% will apply according to the Act, already approved back in 2011.

Conclusion.
The present changes will result in higher personal income tax payments and social security contributions. It is therefore recommendable to investigate whether alternative employment and remuneration schemes could optimize the tax burden of businesses in reaction to the introduced measures.

Tomas Seidl
tseidl@deloittece.com

 

Barbara Krüglstein
bkrueglstein@deloitte.at

 

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