All About the Tax System in Czech Republic

A proper understanding of tax laws and bureaucracy is crucial when entering a foreign market. Tax reform is currently under debate in the Czech parliament and there are plans to implement new tax regulations in 2014. Listed below are the most common, and often complicated, aspects of the Czech tax system.

Tax year in the Czech Republic

One calendar year is considered a tax year. Income tax is as follows:

Personal tax – 15% flat rate based on worldwide income

Corporate tax – 19% rate based on income in the Czech Republic with three exceptions:

1. Investment funds, unit funds, pension funds and pension institutions: 5%.

2. Income from a separate tax base (certain dividends, similar income from abroad): 15%.

3. Certain substantial investments qualify for tax holidays lasting up to ten years.

Value Added Tax (VAT)

VAT is largely influenced by European Union policies. Taxpayers and tax authorities must adhere to these policies. The standard VAT rate is 20%, which applies to most goods and services. Certain services (e.g. public transportation) and essential goods (e.g. food and non-alcoholic beverages) are taxed at the reduced rate of 10%.

VAT Registration Rules

Foreign traders who carry out economic activity through an establishment in the Czech Republic are required to register for VAT if their turnover of the previous 12-month-period exceeded CZK 1,000,000 (approx. EUR 40,000). Registration must be filed with the tax authority no later than the 15th day of the month following the month in which the turnover threshold is exceeded. Foreign trader who are not established in the Czech Republic, but in another EU member state, are required to register for VAT if they supply goods to the Czech Republic in accordance with the rules for distance-selling above the stipulated threshold.

Foreign traders with no establishment in the Czech Republic are required to register for VAT if they become liable in the Czech Republic for taxes on the supply of goods or services or on the purchase of goods from another member state.

Foreign traders with an establishment in the Czech Republic must submit the registration application at their local tax administration office. Traders with no establishment in the Czech Republic should contact: Finanční úřad pro Prahu 1 (Prague 1 Finance Office), Štěpánská 28, 112 33 Praha 1, (Tel.: +420224043115, Fax: +420224041911).

There is no obligation to retain a representative. All foreign entities, however, have the right to be represented.

Dividend Income

Dividend income from Czech companies is subject to final withholding tax of 15%. is excluded from the general personal income tax base and is not subject to social security contribution.

If a company resides overseas, the income is taxed according to its gross amount in the general tax base. Credit relief is available and the rate can be modified according to the relevant double-taxation treaty signed by the Czech Republic and the country where said company is based.

Income Tax

Determining income tax is one of the most complicated parts of the Czech tax system. Debate over income tax simplification and reform is presently being discussed in the Parliament. The following paragraph describes details of tax requirements.

Employers are generally obliged to pay for health insurance on behalf of employees. Employers pay part of the sum required as well as a deducted amount of employees’ salaries. The rates are: 9% on the employer’s side, 4.5% on the side of the employee or 13.5% for private entrepreneur. Minimum health insurance is mandatory for individuals with a permanent address in the Czech Republic as well as for the individual employed by the company located in the Czech Republic.

In periods in which an individual is not covered, voluntary contributions toward a state pension plan can be made. The minimal monthly contribution is CZK 1,660 in order to be credited toward the pension.

Real Estate Transfer Tax

The tax imposed on the sale or transfer of real estate is 3% of either the transfer price or the officially assessed value, whichever is higher. There is also a general real estate tax payable by the legal owner of the building or land located in the Czech Republic. The rates differ based on the type of real estate, its use, location etc.

Customs

Customs duty is paid when importing a commodity from a country that is not a member of the European Economic Area. Every product or commodity falls under a specific tariff. These can be found in the TARIC system, unified European tariff rate application. Bi-lateral treaties may apply.

The Czech Republic has signed numerous treaties that prevent double-taxation. Israel is among the nations with which the Czech Republic has such a treaty.

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