Foreigners, who have moved to the Czech Republic, work or enterprise here, will most likely have to pay taxes here. The question remains, from what income. There is a system of taxation for the so-called tax residents of the Czech Republic (further mentioned only as “CR”) and another mechanism applies to foreigners, who are not tax residents here.   

Who is a tax resident?

The extent of tax duties depends on the status of tax residency. This is determined once a year, after the end of the given calendar year. A tax resident is a tax payer, who pays taxes for his worldwide income in CR, that is including the income gained outside CR, for example in the country, where he was born or of which he is a national. A tax resident thus has the duty to tax even passive income in CR, which he did not achieve here, for example dividends paid by a foreign company, interests from an bank account in Switzerland – it depends on the specific wording of the treaty for prevention of double taxation with the country, from which this income originates (if such a contract has been concluded).

The tax duties of a Czech tax non-resident, on the other hand, are limited only to the income gained from sources on the territory of CR, that is for example from employment carried out here or from income for a post in a statutory body of a Czech company. The income of a Czech tax non-resident will most likely also be liable for taxation in the country, where he is a resident. In these cases, a respective treaty for prevention of double taxation is used again, in order to prevent undesired double tax burden.

How to determine, if a person is a tax resident?

Residency is first assessed from the perspective of the local tax legislation. In keeping with the Czech tax legislation, a person is considered a Czech tax resident, if:

a) the person has a permanent apartment in CR (in the sense of a place, where the person intends to dwell permanently) and/or

b) the person spends 183 and more days in CR in a calendar year (that is the person has its usual domicile here).

In practice, there are often cases, when a person is also considered a tax resident in another country (for example in the country, of which it is a national), based on its intra-state law. Its ultimate tax status (domicile) is then determined based on the treaty for prevention of double taxation concluded between the respective countries.

Most treaties for prevention of double taxation determine tax residency according to the clue bellow. If one of the conditions is fulfilled, others are no longer considered:

(a) An individual is considered a tax resident in the country, where he has a permanent apartment at his disposal. If he has one in both countries, he should be considered a tax resident in the country, to which he has closer personal and economic ties, that is the one, where he has his “centre of vital interests”.

(b) In case the centre of his vital interests cannot be determined or he has no permanent apartment in any country, he is presumed to be a resident in the country, where he usually stays (the time is not specified, it is set based on local legislation, that is 183 days in case of CR).

(c) If this person usually stays in both countries, or neither of them, it is presumed to be a resident in the country, of which it is a national.

(d) If a national of both of these countries or neither of them, the respective authorities of the countries need to resolve this question by mutual agreement.

What income needs to be taxed in CR?

Czech tax law defines the so-called income from sources on the territory of CR, that is those, which can be taxed in CR even for a Czech tax non-resident. Below we mention an incomplete list of example of income, which is considered taxable according to Czech tax legislation:

Income from employment – this includes mainly wages, bonuses and other contributions of similar nature and some benefits (for example a company car provided for service as well as private purposes, frequently also accommodation in an apartment paid by a company for the employee). This income category also includes the income of members of statutory bodies.

Income from self-employment (enterprising) – for example income from the provision of services, mediation of transactions, from the activity of doctors, authors, lawyers, artists and from other activities provided on the territory of CR.

Capital income – for example dividends and interests paid by Czech tax residents.

Rent income – income from letting out real estate and apartments located on the territory of CR, or from moveable assets located on the territory of CR, if paid by a Czech tax resident.

Other income – for example the income from sale of securities, stakes in Czech companies, real estate etc.

Personal tax return or a withholding tax at the source?

The personal income tax return (further mentioned only as “tax return”) must always be submitted by persons, who achieved gross income of a minimum of CZK 15,000 for the year 2015 (without the subtraction of expenditure), if this income is not exempted from taxes or subject to withholding tax. The withholding tax at the source (usually during payment) is used for taxation for example of income from dividends or interest paid by Czech tax residents.

Tax return does not need to be submitted by persons, who only have income from employment (from one employer or several successive employers) or who have other income lower than CZK 6,000 in addition to their income from employment. An exception are the employees, whose annual income exceeded the sum of CZK 1,277,328 in the year 2015. These need to submit tax return always, due to the so-called solidarity tax increase.

For tax non-residents, only the income from sources on the territory of the Czech Republic is monitored.

Tax return is always submitted per calendar year. The deadline for submitting it is April 1, 2016. It may be prolonged until July 1, 2016, if tax return is drawn up by a tax advisor based on authorisation and the financial authority is informed about the fact by March 31, 2016.

What is the tax rate?

The rate of the personal income tax is 15 %. For income from employment, it is applied to the so-called super-gross wages – the wages increased by employers’ contribution to social and health insurance (that is generally 134 % of gross wages). In case of income (or income after subtraction of expenditure) exceeding CZK 1,277,328, an additional solidarity 7% tax increase is applied, moreover (to income exceeding the given limit).   

In the case of the withholding tax, the rate is also 15%, but in case of tax residents from countries outside the EU, with which CR has not concluded a treaty on exchange of tax information or a treaty for prevention of double taxation, as well as in case of persons, who do not prove their tax residency, a withholding tax of 35% will be applied.

Different taxation of statutory bodies based on residency

The taxation of members of statutory bodies is interesting (such as for example a chairperson of the board of directors, or an executive). This differs, depending on whether or not the person is a Czech tax resident. Tax residents are taxed in the same way as employees, but the income of non-residents is subject to a withholding tax of 15 % or 35 % (35 % in the case of countries outside the EU, with which CR has not concluded a treaty on exchange of tax information or a treaty for prevention of double taxation, and also in case of persons, who do not prove their tax residency). The solidary tax increase is then no applied to the income of a “non-resident” member of a statutory body. For illustration, we add a simplified calculation below:

Note: The calculation does not consider any tax credit. It also does not take into account a case, when the executive participates in foreign social/ health insurance (outside CR).

In case you are interested in this topic, or dealing with any of the problems described above, and you are interested in consultation, do not hesitate to contact us.