A monumental tax reform named the government consolidation package has significantly altered the tax landscape in the Czech Republic as we entered 2024. Introduced by the Ministry of Finance as a remedial step towards economic improvement, this measure has brought about remarkable changes in the field of income taxes, value-added tax (VAT), and social security contributions. How will these new rules affect businesses and sole proprietors in practice, and how can these optimize their position in the new tax environment? In our detailed guide, we bring you the latest information on key aspects of this tax reform that will impact everyone conducting business in the Czech market.
Corporate Income Tax (CIT):
The CIT rate has increased from 19% to 21%, aiming to align with the European average, which often surpasses 20%.
This change applies to tax periods from 2024 onwards, so the current tax return for 2023 still calculates with the lower rate of 19%.
The tax increase poses a challenge for companies.
It could be a catalyst for revising and optimizing operations and financial strategy.
Tax Deductible Expenses:
Limitations on tax-deductible expenses apply to the purchase of company cars, gifts (wine), employee benefits, meals, and employee education.
For example, for company cars costing over 2 million CZK, depreciation above this amount will not be tax-deductible.
Deductions for wine as a gift up to 500 CZK are not allowed, but exemption from excise duty remains.
Non-cash meal benefits are subject to the same rules as cash benefits. From the employer's perspective, it's always a deductible expense, and the previous limit of 55% of the meal price is lifted.
New provisions also include changes regarding contributions related to retirement savings. Entrepreneurs can now contribute up to 50,000 CZK annually per individual registration number without increasing health and social insurance costs.
For self-employed individuals (OSVČ), this means the ability to deduct their contributions from the taxable income up to 48,000 CZK per year.
Foreign (Functional) Currency:
Companies can now keep their books in euros, dollars, or pounds if these currencies are functional for them. (However, for tax and VAT calculations, amounts are still converted to CZK based on CNB exchange rates.)
VAT: From 2024
Only two VAT rates will exist: 12% and 21%.
Reduced VAT rates for food, construction work, public transport, medicines, and others, along with increased rates for hairdressing services, author services, and others, present challenges and opportunities for entrepreneurs.
Increase in Social Insurance Contributions for Self-Employed Persons:
The minimum assessment base for social insurance contributions is gradually increasing from 2024, resulting in higher contributions.
An annual increase of 5% is planned from 2024 to 2026, meaning nearly a thousand CZK increase in monthly contributions. (For 2023, the minimum contribution was 2,944 CZK, and it will increase to 3,852 CZK per month in 2024.)
Secondary self-employment will see an increase by one percentage point from 10% to 11% of the average wage, i.e., to 1,413 CZK.
Elimination of Tax Deductions for Self-Employed Persons:
The consolidation package completely eliminates some tax deductions for self-employed persons, such as kindergarten fees and student discounts. It also restricts spousal deductions.
This change applies to tax periods from 2024.
23% Income Tax Rate for More Entrepreneurs:
The personal income tax rate (PIT) for higher incomes is reduced from 48 times the average wage to 36 times.
Self-employed persons with incomes above 1,582,812 CZK will have to pay a higher tax rate of 23% from 2024.
2024 brought a slew of tax changes in the Czech Republic, thanks to the government's consolidation package, which shuffled the deck.
If you're in business, it's crucial to keep an eye on these tax system changes. New rates and adjustments in social insurance contributions might mean you'll need to adapt. It's a challenge but also an opportunity to find new ways to improve your financial situation.
We're at a crossroads now, but it could also be a chance to find a path to better financial stability. Staying informed about these changes and consulting with experts in the field is a smart move right now.