How can Ukrainian employees obtain tax benefits in the Czech Republic?

The employment conditions for workers from Ukraine are gradually changing. Some are now eligible for all tax deductions and benefits in the Czech Republic. Let’s examine under what conditions this is possible.

Employing foreigners in the Czech Republic is a complex procedure, and the employer must meet all legal requirements. However, whether a foreigner has a work permit or is staying under an Employment Law exception, such as a temporary protection visa, makes a difference. This fact also matters for taxation, i.e., determining whether the foreigner is a tax resident or non-resident of the Czech Republic.

How can non-residents of Ukraine obtain tax benefits in the Czech Republic?

Typically, tax non-residents of the Czech Republic can only claim the basic taxpayer discount in their tax declaration or when signing the tax declaration at their employer. Starting in 2023, they can also claim an education discount, and Ukrainian non-residents can claim a donation discount (under the so-called Lex Ukraine) in their tax declaration.

According to the Income Tax Act, other tax benefits (additional tax discounts, tax allowances, or deductions of non-taxable parts of the tax base) can be used only by tax non-residents of the Czech Republic who are tax residents of an EU member state or a state part of the European Economic Area, provided the aggregate of their incomes from sources in the Czech Republic according to Article 22 of the Income Tax Act constitutes at least 90% of their total income (excluding incomes not subject to taxation, exempt from taxation, or incomes taxed at source). The amount of income from foreign sources must be verified by the taxpayer with a certificate from a foreign tax administrator.

However, workers from Ukraine, a third country and not an EU or EEA member, are the focus of this article. Thus, the percentage of income earned in the Czech Republic is irrelevant for obtaining other tax benefits (except for the donation discount for 2023).

How to determine your tax residency in the Czech Republic

In the Czech Republic, a rule dictates that an individual can be a resident of only one state or a resident of one treaty state for part of the year and another for the remainder.

This could be a permanent apartment, owned or rented, where the individual intends to live permanently—they have property, employment, or family there.

If an individual is considered a resident of both the Czech Republic (due to the duration of stay) and Ukraine (due to residence), the criteria set forth in the double taxation avoidance agreement between the Czech Republic and Ukraine will apply.

The treaty lists the criteria in the following order for assessment:

• The residency criterion evaluates the availability of a permanent apartment in both countries.
• The center of vital interests criterion, which takes into account factors such as the residence of the spouse and children and the location of the property, is crucial.
• Habitual abode criterion (183 days),
• Citizenship criterion,
• Agreement between the states.
  

Temporary Protection Visa and Work Permit: Key Differences

Ukrainians who resided in the Czech Republic before the war and continue to live based on a work permit, such as the Blue Card, are often tax residents of the Czech Republic. They do business here, own property, or have families. They can claim all tax benefits by signing a declaration with their employer and submitting an annual tax return.

The situation is more complicated for refugees, who have only received temporary protection here. Some of them still have housing, spouses, etc. in Ukraine.

According to the tax administration’s website, the worker declares their tax resident status, so they must be able to disclose and document all relevant facts. Employers can direct their doubts about an employee’s eligibility as a Czech Republic resident to the local tax office. After assessing all circumstances, the office will issue a certificate of tax residency based on the taxpayer’s application. The taxpayer’s residence address determines the tax authority’s jurisdiction to consider the request.

Tax Domicile

For an administrative fee of 100 Czech crowns, a taxpayer receives a certificate of tax residency in the Czech Republic. Using a specific form, the tax authority issues a certificate of tax residency, either:

• (a) for a specific date, 
• or (b) retrospectively for a tax period or part thereof (from—to).

The administrator issues a certificate for a specific date either on the day of the application submission or on the specified date in the application. However, the tax administration can only indicate the issuance date as the latest date in the “as of” field of the tax residency certificate. It is not possible to issue a certificate for a later date, meaning a future date that has not yet arrived.

Thus, there are two possibilities. Justify the claim for tax credits and benefits within the year using a certificate for a specific date, and request recertification at the end of the tax year if there are doubts. Or, apply retrospectively for the tax year or part of it (from — to). In this scenario, the employer will only apply the basic taxpayer’s allowance in 2024, and will compensate for the other tax benefits in the annual settlement after verifying the taxpayer’s tax domicile for that period. Naturally, this only applies if the taxpayer is a confirmed Czech Republic tax resident.

Conditions for obtaining tax benefits for ukrainian workers not residing in the Czech Republic

An employee can file a tax declaration if their employer assesses them as a tax non-resident or if their tax domicile does not confirm their tax residency, but they can only claim the basic taxpayer discount the following year. At the end of the year, the taxpayer has the option to request an annual calculation of advance tax payments. The employer will consider only income from the Czech Republic (one employer or several consecutive employers). The employer will provide the taxpayer discount in full without reducing it for the period the foreigner worked abroad.

Alternatively, the taxpayer can file their own tax declaration. However, even here, they cannot claim additional tax benefits. They won’t be able to recalculate or consider the tax withheld on contracts that are unrelated to employment.

Source

https://www.podnikatel.cz/clanky/jak-na-uplatneni-danoveho-zvyhodneni-u-zamestnancu-z-ukrajiny/