From 2021, self-employed persons with incomes up to CZK 1,000,000 might pay a flat tax of CZK 5,469 in the Czech Republic, which includes income tax, social security and health insurance. The conditions for registering for flat tax must apply as of 1 January of the given tax period:
- in the previous year, the taxpayer did not have income exceeding 1 million CZK, unless it was income exempt from tax, income that is not subject to tax, or income taxed with withholding tax;
- the taxpayer is not a VAT payer, but may be an identified person;
- the taxpayer is not employed in 2021, with the exception of income subject to withholding tax;
- the taxpayer is self-employed as their main activity; the taxpayer is also subject to Czech legal regulations in the field of social insurance;
- the taxpayer is not a partner of a public company or a general partner of a limited partnership;
- the taxpayer is not a debtor in insolvency proceedings,
To register for flat tax, it is necessary to submit an application to the relevant tax office at the beginning of each tax period (calendar year). If any condition is violated, the participation in the flat tax regime is immediately terminated and this fact must be reported to the tax administrator within 15 days. Voluntary withdrawal from the flat tax regime is possible only after the end of the tax period.
For 2022, it is being considered to expand the range of self-employed persons who could use the flat tax regime to all self-employed persons with income not exceeding CZK 2,000,000. However, the corresponding government amendment to the Income Tax Act has not yet passed the legislative process.
Reintroduction of two tax rates
At the beginning of 2021, the tax package prepared by the Ministry of Finance entered into force. It introduced changes in the method of taxation of the income of natural persons. The labour income tax base in the form of the so-called super-gross wage was abolished when the tax base included not only the gross wage, but also social and health insurance premiums paid by the employer. Furthermore, a second income tax rate of 23% was introduced. A basic personal income tax rate of 15% is applied to incomes up to 48 times the average wage, and an increased personal income tax rate of 23% is applied to all incomes above this threshold since 2021.
The introduction of the second tax rate affects the application of the method of avoiding double taxation subject to progression. While only one basic tax rate of 15% applied until 2021, excluding income taxed abroad did not increase the tax burden on Czech residents. From 2021, however, it is necessary to consider total income and take into account any increase in the effective rate of income tax.
Changes in conditions for tax exemption of income from the sale of immovable properties
In the case of the sale of an immovable property in which the seller does not have a residence and does not use the income to solve their own housing needs, it is necessary to meet the time test so that the income from the sale of the property can be exempted from personal income tax. While there was a five-year time test until 2021, from 2021 the ownership period necessary for the exemption has been extended to 10 years. This extended period applies to immovable properties acquired after the end of 2020.
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