Czech Republic: Taxation of income from employment and entrepreneurship since 2021

As of 1 January 2021, the concept of taxation of personal income from employment changed in the Czech Republic. The structure of the tax base goes back 13 years and will again consist of only gross wages. In the years 2008-2020, the statutory insurance premiums paid by an employer were also added to the employee tax base - in some years actually paid - but in most years only determined according to the Czech or, later, also foreign legal regulations.

Since the beginning of 2021, there have also been minor changes in the method of taxation applicable to all taxpayers. Personal income tax rates are 15% on income corresponding to 48 times the average wage (for the year 2021 the limit applies to approximately CZK 1,700,000, i.e. EUR 65,000), and from the above-mentioned limit, it is necessary to apply a 23% tax rate. It is certainly worthy of note that the same limit also applies as the maximum base for social insurance premiums paid from income from employment and entrepreneurship.

At the same time, the taxpayer tax rebate was increased. Even in 2020, this discount amounted to CZK 24,840 (EUR 950) per year; for 2021 it has been set at CZK 27,840 (EUR 1,070) per year, and for 2022 it will be increased to CZK 30,840 (EUR 1,190) per year. In the following tax periods, the taxpayer tax rebate should start to decrease again.

A complete novelty, which applies for the first time in 2021, is the so-called flat tax. It was introduced as a voluntary option for entrepreneurs who register for this form of taxation no later than 10 January of the given calendar year. The flat tax currently amounts to CZK 5,469 (EUR 210) per month and includes both income tax and social as well as health insurance premiums for entrepreneurs. The conditions for applying for the flat tax are as follows:

• Business revenues in the amount of CZK 1 million (EUR 38,500)/year at maximum,
• No income from employment,
• Other income in the amount of CZK 15,000 (EUR 580)/year at maximum,
• The applicant may not be a VAT payer,
• Insolvency proceedings may not be instituted against the applicant,
• The applicant may not be a partner of a public company or a limited partnership.

The main advantage of the flat tax is the abolition of administrative obligations associated with the completion of declarations and statements and the payment of one amount per collection point. The advantage of using the flat tax must be considered individually, taking into account other circumstances, such as the remuneration for the services of a tax advisor or the need to monitor compliance with the conditions during the taxable period which is a calendar year.

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