How to Save on Taxes in the Czech Republic: A Comprehensive Overview

Entrepreneurs looking to save on income tax can take advantage of not only traditional deductions but also the non-taxable portion of their tax base. Deductions for donations, mortgage interest, or pension contributions can significantly reduce your tax liability — often down to zero!

While some tax benefits were eliminated by last year’s consolidation package passed by the Czech government, several remain in the legislation.

Currently, unlike in previous years, there is no option to claim deductions for contributions to trade unions or for expenses related to exams that certify further education achievements.

By staying informed about available deductions and changes in tax law, entrepreneurs can strategically navigate their finances and maximize their savings.

Make Crucial Tax Decisions by December 2024 to Maximize Your Deductions

The tax period for filing income tax returns, which self-employed individuals must submit by May 31 (under the new law, only electronically) or by July 1, typically follows the calendar year.

Unlike deductions, which are automatic and can only be accounted for when filing a tax return, you will need to settle the bonus in the form of a non-taxable portion of your tax by the end of the year.

For example, you can deduct the value of a gift made in February 2024 or later when you file your return in the spring or summer of 2025, following the changes mentioned above.

“If you want to optimize your taxes for the 2024 tax period that you will file next year, you have the opportunity to deduct certain items from your taxes until the end of this year. All the main items eligible for deduction are listed in Section 15 of the Income Tax Act,” confirms consultant Michal Dvořáček.

Make sure to take advantage of these deductions before the year end.

The law generally states that contributions totaling up to CZK 48,000, paid by taxpayers during the tax year into their tax-deductible retirement savings and long-term care insurance (for which they are the policyholder), can be deducted from their taxable income.

In contrast, companies can deduct funds allocated for scientific research and development, as well as support for vocational education, including expenses related to acquiring property for vocational training and costs incurred per student or pupil, according to Article 34 of the Act.

Employees and self-employed individuals who make advance payments on their income tax throughout the year have the opportunity to achieve overpayments through deductions, which can be reimbursed by the government. However, they must request these reimbursements themselves.

Interestingly, only a small percentage of high-income self-employed individuals pay income tax advances. Those who start their business activities in the current year or who paid CZK 30,000 or less in income tax last year are exempt from making these advance payments.

As a result, many small entrepreneurs who still make up the majority don’t face issues with overpayments but rather with limited opportunities to reduce their taxable income. Nevertheless, they can still save money by deducting amounts for donations, contributions to pension insurance, or mortgage interest directly from their taxable income on their tax return. It’s important to remember that your taxable income is calculated as the difference between your annual earnings and expenses.

A key condition outlined in the law (paragraph 7 of Section 15) is that taxpayers must be residents of the Czech Republic or another EU member state. Additionally, at least 90 percent of their total annual income must be earned in the Czech Republic. 

Income from foreign sources must be verified with documentation from foreign tax authorities. If you have foreign income, you’ll need to provide proof of that income, according to experts.

Exceptions include income that is not subject to taxation under Sections 3 or 6, or that is exempt under Sections 4, 6, or 10, as well as income that is subject to withholding at a special rate.

Consult with the specialists at 360WEDO. We will answer all your questions about taxation in the Czech Republic and assist you with calculations.

What is a Tax Overpayment?

A tax overpayment occurs when, during the year, the taxpayer (either the employer on behalf of the employee or the self-employed individual) makes advance payments on income tax that exceed the total tax liability calculated at the end of the year. The overpayment is simply the difference between these two amounts.

If you have no outstanding debts, the overpayment will be refunded to you. However, you must submit a request for the refund, and the tax office has 30 days to process and pay the amount.

Employees whose annual tax calculation is handled by their employer typically request a refund of any overpayment by February 15 and receive their refund in the March paycheck. Self-employed individuals should remember to submit their request along with their tax return; funds will be credited to their account no later than June or August (if the return is prepared by a consultant). Please note that refunds are only issued if the overpayment exceeds CZK100.

Additionally, it’s worth mentioning that the tax bonus, which applies only to those who already receive deductions for one or more children, has not been limited since last year.

To qualify for the tax bonus, you must have an annual taxable income of at least CZK 113,400 (equivalent to six minimum wages). This threshold changes each year based on the established minimum wage. For next year, the amount will increase to CZK 124,800.

What Can Be Deducted from the Income Tax Base?

I. Donations of Services (formerly Gifts) – Sections 1 and 2 of Article 15 of the Act

The law defines a donation as giving any material item, monetary sum, service, or real estate to another person (whether an individual or a legal entity) free of charge. 

So, who can receive such a gift?

To include a gift in your annual tax calculation, its value must be at least 1,000 czech crowns or exceed two percent of your tax base. You only need to meet one of these conditions.

For a long time, gifts with a total value exceeding 15 percent of the tax base could not be deducted. However, since 2020, it has been possible to deduct up to 30 percent from the tax base for donations made to charitable causes. Although lawmakers initially intended for this temporary adjustment to end in 2021, it has remained in effect in subsequent years. As a result, the 30 percent deduction was available last year and will continue to apply this year.

In other words, private and corporate sponsors who choose to support socially beneficial activities (such as social services and healthcare) will likely be able to take advantage of this increased tax deduction for the 2024 tax period.

Individual donations (up to the specified limit) can also be combined. If you give several small gifts throughout the year, you can deduct the total value of all those items.

Donations of services also include free blood or plasma donations. If you are a regular donor, you can expect a reduction in your income tax.

According to the law, donations can also be made jointly by spouses as part of their “joint property.” If the donation meets the legal requirements, either spouse or both may include it in their annual report (Section 15 of the Act).

If the donor files their own tax return, they should enter the total value of the donation in the appropriate section of the declaration and attach a written document confirming the donation in A4 format.

If an employer prepares the income tax return on behalf of the donor, the donor must provide documentation confirming the donation to their employer by February 15 of the following year and ensure that this document is included in the declaration. The receipt for the donation should contain key information identifying both the donor and recipient, along with details about its value, purpose, and date of donation.

II. Donations During Floods

The law also allows for deductions on donations made to fund disaster relief efforts, such as those for the recent devastating floods. Primarily, these deductions apply to donations given to municipalities, regions, and state organizations for “purposes defined by law.”

However, the situation is a bit more complicated when an individual makes a donation for flood relief to another individual (a private citizen). The law does not clearly state whether such a deduction is possible, leading to various interpretations within the professional community. In the near future, we can expect the government to clarify its stance on whether these types of donations can be deducted, explains tax consultant Stanislava Kochvarova from KODAP.

It’s important to note that for non-cash donations, their value must be determined. This value is either known or should be assessed according to specific valuation rules.

For legal entities, the rules for deductions are slightly different. A company can deduct the value of donations made for similar purposes just like individuals can. However, there is still ambiguity regarding whether a donation given to an individual (a private citizen) for disaster relief can be deducted from the tax base.

For a legal entity to deduct a donation, it must track the value of each individual donation. If the value is below CZK 2,000, no deduction is possible. Otherwise, the entity can deduct up to 10 percent from its tax base if the donation exceeds this amount. There are also expectations that an amendment to the law will raise this limit to 30 percent for 2024, explains Nikola Buchalova, a consultant at KODAP.

III. Interest on Mortgage Loans, Building Savings, and Similar Loans – Sections 3.4 of Article 15 of the Act

Mortgage loans or loans provided by Stavební Spořitelna (building savings banks) are among the most commonly utilized tax deductions in the Czech Republic today, offering significant benefits for income taxpayers.

This is because you can deduct a maximum of CZK 150,000 per year (from all loans taken by taxpayers in a jointly managed household) from the base amount you paid in interest on your mortgage or building savings.

IV. Contributions to Supplementary Pension Insurance and Life Insurance – Sections 5.6 of Article 15 of the Act

Regarding supplementary pension insurance, which is used by hundreds of thousands of people in the Czech Republic, the maximum annual amount that can be deducted from the tax base is currently CZK 24,000. This means that the maximum annual tax savings amount to CZK 3,600.

“The situation with private life insurance is similar to that of traditional ‘pension’ plans. In this case as well, you can deduct a maximum of 24,000 czech crowns per year from your tax base,” reports Dvořáček.

To qualify for this tax deduction, your own contributions under the contract must exceed the amount associated with the maximum state contribution (over CZK 1,000 per month).

For the maximum tax deduction for 2024, there is a requirement for regular deposits under the contract with a monthly deposit of CZK 3,000 or more.

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