Tax reform of the 2008 and Tax system of the Czech republic

At the end of the year 2008, a major act No. 261/2007 on stabilisation of public budgets was passed in the parliament substantially changing most of the tax laws while implementing new elements, rules and restrictions, but, on the other hand, it brings advantages for tax-payers never applicable in the Czech tax system before. This new system of taxation increases dramatically the attractiveness of the Czech Republic as a tax-friendly location and opens new possibilities for both private and individual investors.

Income Tax for Corporations

Income tax for corporations is a flat non-progressive tax with the rate of 24(valid until 2007). In certain corporations, mainly investment funds the taxation is substantially lower and amounts 5 In the years 2008, 2009 and 2010, the tax rate is going to decrease to 21 20and 19 which is one of the lowest tax rates within the whole EU.

In conformity with EU regulations, there is an exemption from the dividend tax when it is paid out to another corporation fulfilling the criteria of a parent company. There is a 15dividend tax on dividend payment to private investors. This, however, is governed by double tax treaties, that may in certain case regulate taxation otherwise. Since the year 2008, the participation exemption applies in the full range on participations exceeding 10held for more the 12 months, whereas the holding period condition may be fulfilled ex-post.
A new element implemented by the reform is the thin capitalisation rule, which limits the third party loan to a sextuple of the equity for the year 2008 and quadruple for the year 2009 and further. A loan from a related party is limited to a double of the equity (does not apply to previously granted loans). The interest rate must be at a moderate level and the loan must conform to some other limitations.

Income Tax for Private Individuals

Income tax for private individuals applies to resident tax payers in the full range of their income and tax non-residents for income originating in the Czech Republic. The tax rate is progressive and ranges from 12for the lowest income to 32for the highest income groups (valid until 2007). Since 2008, the tax rate in non-progressive and amounts 15for the year 2008 and 12,5for the year 2009. There is a wide range of tax exemptions for private individuals covering exemptions of capital gains from transfer of shares (after holding period of 6 months for joint-stock company known as A.S., 5 years for Limited liability company known as S.R.O. an selected other legal forms), real estate (the exemption can be achieve in 2 to 5 years depending on particular conditions) and many others. The tax reform of 2008 imposed larger restrictions on the capital gain exemptions in private investors and the 6 month holding test in A.S. companies only applies to minority investments (not exceeding 5in the past 24 months). However, the shareholding acquired until the end of the year 2007 follow the old rules.

Salary Taxation

The above mentioned tax rates apply to salary taxation as well, there are, however, some other tax-like duties the employee / company have to pay or fulfil. What plays a key role in the salary and employment policies of the client are the social security and health insurance duties, which burden not only the employee but also the employer that has to pay additional 35on top of the gross salary of the particular employee. According to the Czech salary practice, salaries are usually mentioned as gross per month, which represents the point of view of the employee and does not include the insurance part above. The total company costs are hence 35higher than what is generally understood as gross salary. The tax reform 2008 brought a new element, which is a yearly ceiling of the health insurance and social security. Once the employee reaches the gross salary of CZK 1,034,880, neither the employer nor the employee is obliged to pay the insurance any more. It can be very motivational and tax efficient for the companies and the management to use the bonus scheme, where large bonuses are taxed with only 15 (supposing the total yearly gross salary exceeds the given limit).

Value Added Tax

Value added tax follows the concept frame given by the EU. The high rate is 19 the low rate is 9(5until the year 2007). There is a political will to bring the rates nearer in the future. In the field of residential building the Czech Republic had an exception till the end of 2007 according to which the residential building supplies (= new constructions or sales) and repairs could be burdened with the low VAT rate. After this deadline, only the so called social housing shall be burdened with the lower rate. However, the VAT law defines the social housing rather generously as maximum 120 square meters of living space for a flat and 350 square meters for a house, which enables most houses and flats to remain in the low rate taxation group. Until the end of the year 2010, the repairs, reconstructions and refurbishments of residential housing is taxed with the low rate.

Other Taxes

The other taxes include Real estate tax, road tax, succession duty, gift tax, real estate transfer tax, and consumption tax.

Real Estate Tax

The tax on buildings is based on the area of land occupied. The rates on the main types of buildings are:

• Residential, agricultural - 1 CZK/m2
• Industrial - 5 CZK/m2
• Other business - 10 CZK/m 2

The square meter rate is increased for additional floors.

Real estate tax on land is calculated either from their value (mainly agriculturally exploited land) or from the size (non agricultural exploitation) Agricultural land is taxed by the rate of 0.75of the deemed value, special rates apply for forests, lakes and ponds; non-agricultural land is taxed by CZK 1-10 per square meter, which can locally be increased by a co-efficient of max. 5.

Real Estate Transfer Tax

This tax is payable by the seller of immoveable property and is deductible for income tax purposes. The tax is calculated as 3of the sale price (or 3of the officially estimated price, whichever is higher).

Gift and Inheritance Tax

Gift tax is borne by the recipient of the gift. The rate of gift tax is between 1% and 40%, depending on the value of the gift and the relationship between the parties. Inheritance tax is charged at half of the gift tax rate. Within the relatives (parents-children-brothers and sisters, spouse etc) a tax exemption applies

Road Tax

Road tax is generally payable by the operator of a vehicle registered in the Czech Republic; the tax rate varies from CZK 1,200 to CZK 4,200 in the case of passenger vehicles and from CZK 1,800 to CZK 50,400 in the case of other vehicles.

Our team can provide you with high-quality advisory service covering all applicable taxes and duties.