Thinking beyond borders
Personal income tax is imposed on the income of individuals. Those who have a permanent residence in the territory of the Czech Republic or who usually reside in the Czech Republic are liable to pay tax on their worldwide income, unless a double taxation treaty stipulates otherwise. The aggregate income is taxed at a flat rate of 15 percent. Employment income is taxed based on the ‘super gross’ salary, discussed below.
Extended business travelers are likely to be taxed on employment income relating to their Czech workdays. Non-residents are liable to pay tax on income generated from sources in the Czech Republic.
A person’s liability to Czech income tax is determined by the individual’s tax residence status. A person can be a resident, non-resident, or split resident for part of the year for Czech tax purposes.
An individual will be considered a Czech resident for tax purposes if:
Individuals who usually reside in the Czech Republic are understood to be persons who stay in the Czech Republic for at least 183 days in a given calendar year, either continuously or intermittently.
The general rule is that a person who is a tax resident of the Czech Republic is liable to declare and pay tax in the Czech Republic on the individual’s worldwide income, which includes employment income, income from self-employment, rental income, investment income and capital gains, and other taxable income from whatever source.
Individuals who are Czech non-residents for tax purposes are subject to tax only on income from Czech sources.
The taxpayer must file an annual income tax return for all resident years. The taxpayer must also file an annual income tax return for the year in which the assignee leaves the Czech Republic, provided that in the year concerned, the taxpayer performed activities in the Czech Republic and is not protected by a double tax treaty. The tax return is to be filed within the statutory deadline(s) for filing.
In the years following the year of expatriation, the assignee does not generally have any filing requirements provided that the assignee is treated as a tax non-resident and has no Czech-sourced income.
If, however, the assignee receives Czech-sourced income related to the individual’s prior work in the Czech Republic, the assignee may be liable to declare and pay tax in the Czech Republic on a proportionate part of the income.
For extended business travelers, the types of income that are generally taxed are employment income, Czech-sourced income, and gains from taxable Czech assets (such as real estate).
The aggregate income is taxed at a flat rate of 15 percent. In the case of employment income, the rate is applied to a ‘super gross’ salary. A ‘super gross’ salary is calculated as gross salary increased by 33,8 percent of the employer part of the Czech obligatory social security and health insurance contributions in case of the employees who are subject to Czech social security scheme or hypothetical if the employee is not subject to the Czech social security scheme; except the individuals who are obligatory insured in other EU Member State, Switzerland or in the EEA state. In case of these employees the ‘super gross salary’ shall be calculated as gross salary increased by the employer part of the foreign obligatory social security and health insurance contributions.
As a consequence of this calculation, the effective tax rate in case of the employees subject to Czech actual or hypothetical social security and health insurance contributions is 20.1 percent until the cap for social security contributions is reached (see the section “Cap for social security” that follows). In addition to standard 15 percent flat rate, there is a 7 percent solidarity tax imposed on annual’s gross personal income (including both employment and self-employment income) over 1, 672,080 Czech Republic koruna (CZK) in 2020). The solidarity tax on employment income is, however, due also monthly in each month when income exceeds 1/12 of the above threshold as an advance payment.
Extended business travelers employed by an employer located in a European Economic Area (EEA) member state or Switzerland can remain, in most cases, subject to their home country/jurisdiction’s social security scheme. This exemption is based on the EEA/Swiss rules with respect to postings and/or simultaneous employment.
Other extended business travelers, in some cases, may stay in their home countries/jurisdictions’ social security systems and obtain an exemption from paying Czech social security based on the provisions of social security totalization treaties signed between their home countries/jurisdictions and the Czech Republic.
If no continued home country/jurisdiction social security coverage and no subsequent exemption from social security contributions are available, an extended business traveler will be subject to Czech social security.
An employee who works in the Czech Republic for an employer with a registered office outside the Czech Republic is exempt from the social security scheme, provided that the employer’s registered office is in a country/jurisdiction that has not concluded a totalization agreement on social security with the Czech Republic, and provided that the employee is not considered an economic employee of a Czech entity.
If the individual is considered an economic employee of a Czech entity, the employee shall be subject to Czech social security scheme.
Social security rate
The employer’s social security rate is 33,8 percent, consisting of 24,8 percent for the social insurance scheme and 9 percent for the health insurance scheme.
The employee’s social security rate is 11 percent, consisting of 6.5 percent for the social insurance scheme and 4.5 percent for the health insurance scheme.
Cap for social security
For social security payments, both the employee´s and employer´s portions, the maximum assessment base is set (for 2018, the cap for social insurance scheme is CZK1,672,080. The health insurance contributions, both the employee’s and employer’s portion are uncapped. Once the cap for social insurance payments is reached, no more social insurance contributions are due from either the employee or employer during that year.
Tax returns must be submitted by 1 April of the following year, or 1 July if the return is prepared and submitted by a certified tax adviser. In the latter case, a power of attorney on behalf of the tax adviser must be lodged with the tax authority by 1 April in order to obtain the automatic extension of the deadline to 1 July.
Withholdings from employment income are covered under the Pay-As-You-Go (PAYG) system. The income of an individual paid by a Czech entity (this includes also Czech branch of a foreign entity) based on a local contract with a Czech entity, or working in the Czech Republic under the economic employer structure, is subject to monthly wage tax withholdings. The withholdings are made by the employer or economic employer through payroll deductions. Similarly, also a foreign entity having its permanent establishment (PE) in the Czech Republic (except the service PE) or employing in the Czech Republic employees for a period of more than 183 days is obliged to make withholdings through payroll deductions.
In other cases, there are no withholding requirements, and the tax is reflected fully through the personal income tax return.
Foreign nationals who come to the territory of the Czech Republic are subject to the so-called Foreigners Act, which establishes two categories of foreigners:
European Union (EU) nationals
EU nationals, the EEA or Switzerland, and their family members are no longer required to obtain both a work permit and a residence visa to work in the Czech Republic, regardless of whether they are employed by a local or foreign company. EU citizens may stay temporarily in the Czech Republic, without any permit, on the basis of a passport or an identity card. Under the Foreigners Act, if their intended stay is longer than 30 days, foreigners are required within 30 days of arrival to report their presence to the office of the Foreign Police responsible for the area in which they are staying. If they intend to stay in the Czech Republic for longer than 3 months, they can request a certificate of temporary residence or after 5 years of continuous residence in the Czech Republic (2 years continuous residence applies to EU citizens who are family members of the Czech citizen who has permanent residence address in the Czech Republic or the family member of the other EU citizen who has permanent residence in the Czech Republic) a permanent residence permit.
Third country/jurisdiction nationals are subject to visa policy. For short-term stays (not exceeding 90 days), most are required to hold a visa, while citizens of some third countries/jurisdictions are exempt from the visa requirement.
To stay in the Czech Republic for more than 3 months, citizens of non-EU countries/jurisdictions require a long-term visa or a long-term or permanent residence permit.
Third country/jurisdiction nationals may be recruited and employed provided that:
The green card was abolished during 2014 as a result of implementation of Directive 2011/98/EU on a single application procedure for as single permit for third country/jurisdiction nationals to reside and work in the territory of a Member State and was replaced by new dual document – i.e. the employee card.
In addition to Czech domestic arrangements that provide relief from international double taxation, the Czech Republic has also entered into double taxation treaties with more than 80 countries/jurisdictions to prevent double taxation and allow cooperation between the Czech Republic and overseas tax authorities in enforcing their respective tax laws.
There is the potential that a permanent establishment could be created as a result of longer-term activities of extended business travelers, but this would be dependent on the type of services performed, the length of stay in the Czech Republic, the structure under which the extended business travelers work in the Czech Republic, and the level of authority the employees have.
There are three types of indirect taxes: value-added tax (VAT) – charged on most supplies of goods and services; and excise duties – charged on supplies of specific goods such as fuels, beer, wine, spirits, and tobacco.
A transfer pricing implication could arise to the extent that the employee is being paid by an entity in one jurisdiction but performing services for the benefit of the entity in another jurisdiction, in other words, a cross-border benefit is being provided. This would also be dependent on the nature and complexity of the services performed.
If the companies are regarded as related through equity/capital, or as otherwise related persons, there may be a transfer pricing issue as market prices should be used.
The Czech Republic has data privacy laws
There are no extraordinary exchange controls placed on individuals that restrict the transfer of money into or out of the Czech Republic.
Generally, some benefits provided by the employer are regarded as non-deductible on the employer side, such as school fees or medical care provided in kind, but these are tax exempt on the side of the assignee.
All information contained in this publication is summarized by KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity, based on the Czech Income Tax Act No. 586/1992 Coll. and subsequent amendments; the Czech Social Insurance Act No. 589/1992 Coll. and subsequent amendments; the Foreigners Act No. 326/1999 Coll. and subsequent amendments; the Web site of the Czech fiscal administrations; the Web site of the Czech Social Security Authority; the Web site of the Czech Ministry of Foreign Affairs, the Web site of the Ministry of the Interior of the Czech Republic.