The President of the Czech Republic signed a consolidation package. What will change on January 1, 2024?

In November, Czech President Petr Pavel put his signature on a consolidation package that brings forth alterations to a multitude of laws, with a primary focus on taxation. Notable changes encompass the introduction of only two value-added tax rates, set at 12% and 21%. Furthermore, the corporate income tax rate is slated to rise from 19% to 21%. Property taxes are also on the agenda for an average increase of 1.8 times.

Provided below is a brief overview of the modifications incorporated in the consolidation package.

Social insurance contributions for self-employed individuals

Self-employed individuals can anticipate an upswing in social insurance contributions. Specifically, the minimum base used to calculate these contributions will experience an increment from 25% to 40% of the average salary from 2024 to 2026. This entails a yearly rise of 5 percentage points.

Corporate income tax

The tax jurisdiction will encompass income derived from all facets of a company’s activities. In 2024, the tax rate applicable to the income of legal entities (firms) in the Czech Republic is set to escalate from 19% to 21%.

Companies will be able to keep accounting records in foreign currency

Starting in 2024, companies operating in the Czech Republic will have the option to manage their accounting records in euros, US dollars, and pounds sterling. This privilege is extended to those companies primarily engaged in transactions denominated in a specific foreign currency.

Employee health insurance premiums will increase

Presently, employers cover sickness insurance at a rate of 2.1% of the gross salary. However, commencing January 1, 2024, employees will be obligated to contribute 0.6% of their gross wages towards this form of insurance.

Changes to personal income tax

Presently (December 2023), the Czech Republic employs two income tax rates: 15% and 23%, with the higher rate applicable to income exceeding four times the average salary (currently approximately CZK 161,300).

Under the forthcoming adjustments, the threshold triggering the higher rate will decrease to 3 times the average salary, equivalent to around CZK 121,000 per month.

These modifications will also impact self-employed individuals, who will now be subject to an increased tax rate on profits exceeding 36 times the average salary, a reduction from the current threshold of 48 times.

Reduction of tax credits and benefits

In the realm of income tax, there will be limitations imposed on tax credits related to the purchase of passenger cars for business purposes, capped at two million crowns (the car’s cost).

Within personal income taxes, the tax benefit for non-working spouses will be discontinued and will now exclusively apply to parents caring for children under 3 years old. Additionally, both the tax credit for attending kindergarten (applicable up to the minimum wage) and the student discount of CZK 4,020 will be entirely eliminated.

In the context of income generated from lotteries and gambling, the tax exemption threshold will decrease from 1 million to CZK 50,000. Simultaneously, the deduction for union dues will also experience a reduction.

Tax incentives for employment contracts

Significant adjustments have been introduced concerning the insurance participation of employees engaged in fixed-term work contracts (and correspondingly, the limits for social insurance contributions).

Two distinct limits have been established: the first at 25% of the average salary for a fixed-term contract with a single employer, and the second (higher) limit at 4% of the average salary for a combination of multiple fixed-term contracts with various employers.

In the event that an employee surpasses either of these limits, the insurance premium will be deducted from their salary. To ensure the effective implementation of this measure, a registry will be implemented to record all contracts and associated income.

Property taxes will also rise

Anticipate an uptick in property taxes. The generated property tax revenues will stay within municipalities, but the distribution of these revenues will be adjusted favorably toward the state in terms of budget allocation (CZK 10 billion). This adjustment will be manifested through a 1.8-fold increase in the tax rate.

Vignettes will become more expensive

Effective January 1, 2024, motorway tolls in the Czech Republic will undergo modifications. The price of an annual vignette on toll roads is set to rise by 800 CZK, jumping from 1,500 to 2,300 CZK. Furthermore, there will be an annual revision of vignette costs to accommodate inflation. Additionally, a new option of a one-day vignette will be introduced.

Simplified VAT structure: transition to a single 12% rate

Beginning January 1, 2024, the current two-tiered system of reduced VAT rates (10% and 15%) will be streamlined into a single reduced rate of 12%. Additionally, certain items that were previously subject to lower rates will now be taxed at the standard rate of 21%.

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