Starting in July, new reporting requirements for employment contracts in the Czech Republic

Starting in July, authorities in the Czech Republic must be informed about all contracts for work (DPP), including those with compensation below 10,000 Czech crowns. The overall process for entering into such contracts will undergo changes.

The social security administration will now allow employers to register a single, notified work agreement (DPP). This agreement will set a cap on social insurance contributions at 25% of the average salary. Other contracts will pay contributions up to a cap of 4,000 Czech crowns. This system will be implemented in 2025.

The Consolidation Package for DPP Contracts contains unfulfilled proposals

The proposed changes to DPP contracts will undergo further modifications before they come into effect. The consolidation package included the introduction of two threshold values, beyond which insurance contributions would become mandatory.

• The first threshold was planned to be set at 25% of the average salary for an employment agreement with a single employer.
  
• The second threshold was to be set at 40% of the average salary for participating in insurance programs while simultaneously holding several work contracts with multiple employers.

If an employee exceeds any of these limits, he will have to pay insurance contributions, and the employer will need to pay additional amounts at the end of the year.

Besides changing the limits, there is a new requirement to register all work contracts and the income from these contracts. The effective date of both changes is July 1, 2024.

Challenges and Oversights in the Consolidation Package: Impacting Agreements

During the approval of the unified package, businesses, trade unions, and industry experts criticized the proposed amendments to the agreements.

In the case of social insurance, it was stated that if the aggregate limit is exceeded, the employer will only pay that part of the contribution that he pays within the period established by law. The part of the contribution that the employee must pay will be collected by the social security authorities (ČSSZ).

However, there is no such agreement regarding health insurance.

In practice, this would mean possible problems for employers when deducting expenses from the employee’s health insurance amount.

The employee could accuse the employer of withholding money from him if he did not exceed the aggregate limit.

In addition, the employee could demand interest from the employer, even if it was only a few crowns.

In an interview with Podnikatel.cz, Jiri Nesrovnal, member of the presidium of the Chamber of Tax Advisors of the Czech Republic (KDP CR) and head of the corporate income tax section of KDP CR, explained that the administration associated with this would be extremely difficult to implement in practice.

From July, all DPP agreements will have to be reported to the authorities

However, the government did not take into account the experts’ warnings, and parliament approved the proposal as presented. The Cabinet of Ministers reached a compromise with business associations and, through Minister of Labor and Social Affairs Marian Jurečka, presented an amendment to the Investment Company Law that will change the regulation of the DPP before July 1. The only thing that remains in force under the consolidation package is the obligation to report agreements, even those under the established limit, to the authorities, starting in July.

The effective date of the new rules will be delayed until 2025, after which the two-limit system of insurance contracts will be completely changed. DPPs will now be treated as general employment for purposes of the Health Insurance Act under the basic scheme.

The DPP limit will be 4,000 CZK

According to the explanatory memorandum to the law, if a DPP agrees to an income of CZK 4,000 (in 2024) or more, this DPP entitles you to insurance coverage from the date of employment commencement.

If the income was not agreed upon or was agreed upon in an amount less than CZK 4,000, then we are talking about small-scale employment. In this case, insurance participation is subject to the provisions of §7 of the Health Insurance Act.

Thus, participation in health insurance will only arise when the income from small employment (including this DPP) in a calendar month is at least CZK 4,000 (in 2024).

The agreed-upon DPP limit would be 25% of the average salary

At the same time, an employee working under such an agreement will be able to register under a special scheme known as a “notified agreement.”

Within a calendar month, only one employer will be able to use the pre-notified agreement scheme on an employee.

“Suppose an employee approaches the employer and says he wants to sign a contract with him to perform work with notice (main). The employer must electronically notify the labor department of its intention to apply the notified agreement regime to the employee, i.e., a higher limit on social and health insurance contributions. The employer can then check using the ČSSZ electronic portal whether he has succeeded in doing this, i.e., whether the employee applies this scheme to another employer,” tax expert Jiri Nesrovnal told.

Consolidation of Income from Contracts and Its Tax Implications

The explanatory note outlines that the health insurance system will integrate employees deriving income from a work contract—where the employer does not engage the notification regime—under the same provisions as other forms of employment, such as employment contracts and relationships. Such income may constitute a distinct tax base and be subject to a unique tax rate, particularly if it does not reach the threshold specified in § 6(4)(b) of the Income Tax Act.

Consequently, the notice scheme will not treat an employee’s income from a DPP contract, say, CZK 7,000, as a separate taxable entity for special rate withholding. It’s crucial to recognize that the limitations in § 6(4) of the Income Tax Act are accumulative. For instance, if a taxpayer has a work contract yielding a monthly income of CZK 3,000 from an employer outside the notification regime, and concurrently holds an employment contract with a CZK 2,000 monthly earning, these incomes are aggregated for the purposes of § 6(4)(b) of the Income Tax Act.

The Chamber of Deputies is preparing for a third reading of this proposed amendment. Besides the regulation of contracts and modifications to the Investment Company Act, the legislation also proposes new tax exemption measures for employee benefits.

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