On 4 November 2022, the Chamber of Deputies approved an amendment to the Income Tax Act (ITA) and the Value Added Tax Act (VAT) – Parliamentary Print No. 254. The proposal was forwarded to the Senate for consideration.

In this article, we will present some changes to the personal income tax that are expected to come into force from 1 January 2023.

1. Flat-rate tax

From 2021, self-employed persons can pay personal income tax and social security and health insurance premiums through the so-called flat-rate tax.

The main objective of the amendment is to expand the circle of persons, who will be allowed to enter the flat-rate tax regime, especially in connection with the amendment to the VAT Act, which Proposes to increase the limit for VAT registration from the current CZK 1,000,000 to CZK 2,000,000 for twelve consecutive months.

To enter the flat-rate tax, the taxpayer must meet the following criteria:

• He is a self-employed person (but not a partner in a general partnership or general partner in a limited partnership).
• He is not a VAT payer (i.e. income up to CZK 1,000,000 or CZK 2,000,000 after the amendment).
• On the first day of the relevant tax period, he or she is not engaged in an activity, from which income from employment is derived (with the exception of income subject to withholding tax).
• Apart from income from self-employment, the person has only exempt income, income outside the scope of the tax or income subject to withholding tax.
• In addition to the aforementioned income, it has income from capital assets, rental income or other income, provided that the total amount of such income does not exceed CZK 15,000 (proposed increase to CZK 25,000 or amendment proposal to CZK 50,000).
• The taxpayer submits a notification of entry into the flat-rate scheme to the tax administrator by 10 January of the respective year, in which the taxpayer chooses a flat-rate scheme band (based on income in the previous year) – see below.

Another novelty is the proposal to introduce three categories of flat-rate tax, depending on the amount and nature of the self-employed person’s income.

Explanatory notes to the table: SI = social insurance, HI = health insurance

If during the tax period there is an increase/decrease in income, so that the self-employed person falls into a different band than the one he/she originally chose, he/she would be allowed to transfer to a different category:

1. If the self-employed person meets the conditions for a lower flat-rate tax band, he/she will be able to submit a notification for a different amount of flat-rate tax. The tax will then be calculated according to the lower band and an overpayment of tax will arise. It was originally proposed that the amount of social security and health insurance premiums remains and cannot be changed retroactively (i.e. overpayments are not refunded), however, an amendment was approved during the discussion that a self-employed person can also apply to have these overpayments returned.
2. Conversely, if the self-employed person exceeds the applicable income for a given band, then he or she is obliged to submit a notification of a different amount of flat-rate tax to the tax authorities. The flat-rate tax and insurance premiums will increase and the taxpayer will be obliged to pay the difference (due by the deadline for submitting the tax return). In the event that the taxpayer does not file a notification of change to a higher band, the flat-rate regime will be terminated, resulting in the obligation to file a tax return and social and health insurance statements for self-employed persons.

2. Limits for submitting tax return

 As part of the amendment, it was originally proposed to increase the limit of income establishing the obligation to file tax return from the current CZK 15,000 to CZK 25,000. During the discussions, MPs eventually agreed on a more significant increase, to CZK 50,000. An individual with annual income of up to CZK 50,000 (gross income before deduction of expenses, excluding exempt, non-taxable or withholding taxable income) would not be obliged to file personal income tax return.

The obligation to submit tax return should also not apply to employees, who do not have other taxable income outside of employment exceeding CZK 20,000 per year (previously the limit was CZK 6,000, the original proposal was to increase it to CZK 10,000). These employees will be able to ask their employer for an annual settlement of advance tax payments.

 3. Exemption of gratuitous acquisition of a co-ownership interest in immovable property from a municipality or from a taxpayer, of which the municipality is a member or founder

The above-mentioned amendment to the ITA should also allow individuals to exempt from income tax a gratuitous acquisition (donation) of a co-ownership interest in immovable property from a municipality or from another taxpayer, of which the municipality is a member or founder (i.e., for example, from a voluntary association of municipalities, a housing cooperative or a contributory organisation).

The exemption may be applied, provided that the following conditions are met:

1. the construction of the immovable property was subsidised from the state budget in the period of 1995-2007 through a programme supporting the construction of rental housing and technical infrastructure or from the State Housing Development Fund.
2. the transfer of the immovable property to another person has been prohibited for a specified period of time by the terms of the grant and this is the first transfer after the expiry of that period, with the transfer serving to place the immovable property in the ownership of a natural person.

In order to qualify for the exemption, the transfer must be a gratuitous transfer intended to transfer a co-ownership interest to an individual. The property can either be transferred from the municipality directly to an individual, or it can be transferred to a housing cooperative, which will subsequently be transformed into an association of unit (flat) owners (SVJ).

If you are interested in additional information, please do not hesitate to contact us.

 Author: Roman Burnus, Vendula Florešová