Konsolidační balíček schválen

Consolidation package approved

After many vicissitudes, MPs have just approved a package of tax reforms - the so-called consolidation package (more details HERE). This amendment will now go to the Senate.

Below is a brief summary of selected changes approved by MPs.

Corporate income tax/accounting[1]

• Tax rate - Increase the corporate income tax rate to 21% (from the current 19%).
• Functional currency - The possibility of keeping accounting records in a currency other than the Czech currency is newly introduced through the new institution of the accounting currency, which may be the Czech koruna, the euro, the US dollar or the British pound if this currency is also the so-called functional currency of the accounting entity. This should be the currency of the primary economic environment in which the entity operates. The accounting currency may be changed only at the first day of the accounting period. It may be changed back to the Czech currency only if the other currency ceases to be the functional currency of the entity. Our understanding is that the general goal is that, although the foreign currency cannot be used directly for the calculation of income tax, it can be used in the defined sub-steps necessary for the calculation of income tax (i.e. the conversion of only aggregated items). For more on this topic, see our alert HERE.
• Option to exclude unrealised exchange rate differences - A new option is given to exclude unrealised exchange rate differences from the tax base in the period of their creation (recognition) and to include them in the tax base generally (with certain exceptions) only in the period when the exchange rate difference is realised (notification to the tax administrator of entry into this regime is required).
• Income tax report - The Accounting Act introduces a new obligation (for selected entities) to prepare and make available an income tax report. This is an implementation of the obligations arising from the European Directive on public CbC reporting (for more details, see HERE). According to the transitional provisions, the income tax report is to be prepared for accounting periods beginning no earlier than 22 June 2024.
• Sustainability report - A new obligation to prepare and make available a sustainability report is introduced in the Accounting Act. Due to a phased-in introduction in several stages, this obligation is now imposed (for accounting periods commencing as early as 1 January 2024) only on entities that are (cumulatively)  (i) a corporation, (ii) a public interest entity, (iii) would be a large entity even if it were not a public interest entity, and (iv) exceeded the criterion of an average of 500 employees per accounting period as at the balance sheet date (some exceptions apply).
• Limit of deductibility for vehicles - A new limitation is introduced, according to which only the proportional part of depreciation of a vehicle of category M1 (with certain exceptions) - put into a condition eligible for normal use from 1 January 2024 - calculated according to the ratio of the amount of the limitation of expenditure for such a vehicle - i.e. CZK 2,000,000 - and the aggregate of the expenditure incurred on such a vehicle - i.e. generally the purchase price (similarly for rent when acquired by means of a finance lease). The intention of the amendment is that, in relation to an M1 vehicle, generally no more than CZK 2 million can be claimed as an expense through depreciation and that the part of the depreciation that was not tax deductible at the time of possession of the car can no longer be claimed in the tax base (e.g. on sale). For more information on this topic, see our alert HERE.
• Extraordinary depreciation for emission-free vehicles - The possibility to apply extraordinary tax depreciation is extended for emission-free road motor vehicles acquired between 1 January 2024 and 31 December 2028.
• Meal allowances - On the employer's side, the tax deductibility of expenses for meal allowances should now be assessed in accordance with the current Section 24(2)(j)(5) of the Income Tax Act (ITA), i.e. expenses incurred to fulfil employees' rights relating to their working and social conditions (i.e. including meals) arising from a collective agreement, an internal regulation of the employer or a contract concluded with the employee should generally be deductible (see below in the section Personal Income Tax for related considerations regarding exemptions).
• Non-monetary benefits - Expenses for non-monetary benefits to employees in the form of Section 25(1)(h) of the ITA will be tax non-deductible for employers if they are also exempt for the employee under Section 6(9)(d) of the ITA (see new exemption limitation below in the Personal Income Tax section).
• Tax deductibility of selected benefits for employees' family members - The provisions of Section 24(2)(j)(4) of the Income Tax Act (formerly Section 24(2)(j)(5)) are amended so that the employer's expenses for selected employee benefits provided not only to the employee himself but also to his family members are treated as tax deductible under the relevant conditions.
• Silent wine - The tax deductibility of silent wine as a marketing item up to CZK 500 is abolished.
• Notification of income flowing abroad - The payer's obligation to notify income flowing to a non-resident taxpayer that would be subject to withholding tax but is exempt from tax or is not subject to taxation in the Czech Republic on the basis of an international double taxation treaty is reduced to selected passive types of income (at the same time, the existing simplifying materiality limit for exemption from the notification obligation will apply only to selected income). This new rule could be applicable already to income for 2023.
• Ukraine/donations - Income tax measures to support charitable activities - in particular aimed at helping Ukraine and its population (under Law No. 128/2022) are generally extended for 2023 under the existing conditions

Personal income tax/employment[2] 

• Reduction of the threshold for applying the higher tax rate - The threshold for applying the tax rate of 23% is reduced. A taxpayer's tax base exceeding 36 times the average wage will now be subject to the higher tax rate (compared to 48 times today). Similarly, for the income tax on employees' monthly payroll, the monthly limit for applying the higher tax rate will be reduced from four times the average wage to three times the average wage when calculating the advance payment.
• Employee Benefits - For defined benefits under Section 6(9)(d) of the ITA, an aggregate limit for tax exemption (and therefore insurance premiums) of half of the average wage will be introduced (for 2023, the limit would be CZK 20,162 per year).
• Employer-organised events - Income derived from an employee's (or family member's) participation in a sporting or cultural event organised by the employer will now be specifically exempt from tax. According to the Explanatory Memorandum, these should be events (i) of a "non-public" nature, (ii) which employers usually organise for employees in a given form and scope, (iii) organised "occasionally" (e.g. Christmas parties, company anniversary celebrations or children's days), (iv) which are "usual" or "reasonable" in the context of the circumstances. According to the Explanatory Memorandum, the criterion of frequency is not met by events held regularly (e.g. parties held on a weekly basis) and the criterion of reasonableness is not met by, for example, holding a Christmas party in an exotic destination or in other quite exceptional circumstances. Such income will therefore not be affected by the new aggregate limit for the exemption of employee benefits mentioned above.
• Meals - The exemption conditions for the provision of meals to employees are aligned. The current exemption applicable to the so-called meal allowance will generally also apply to meals provided in a non-monetary form (meal vouchers, company meals).
• Repeal of the tax exemption for so-called managerial flats - According to the transitional provision, the repeal should not affect persons who resided in the flats before the law came into force.
• Private use of an emission-free car - The non-cash income of an employee who has an emission-free car for business and private use will be only 0.25% of the purchase price of the car.
• Restrictions on the spouse discount and other discounts - The conditions for applying the spouse discount will be tightened; in addition to the condition of the spouse's income not exceeding CZK 68,000 for the tax year, there will be a condition that the spouse must live in a jointly managed household with the taxpayer's child who has not reached the age of 3. The student discount and the discount for the placement of a child (the so-called pre-school fees) are abolished completely.
• Capping the exemption of income from the transfer of securities from 2025 - The consolidation package introduces a capping of the exemption of income from the transfer of shares in corporations and securities from personal income tax at CZK 40,000,000 per tax year. The effectiveness of this measure is postponed by one year, i.e. as of 1 January 2025 (including the related possibility to "revalue" the acquisition value of shares and securities as of 31 December 2024). More on this topic in our alert HERE.
• Taxable foreign exchange gains - The exemption for foreign exchange gains on the exchange of money from a foreign currency account is abolished (today's Section 4(1)(ze) of the ITA).
• "General" exemption limit - A "general" limit of CZK 50,000 is introduced, within which certain other income of the same kind will be exempt.
• Self-employed persons' reporting obligation - Persons with income from self-employment will have an extended reporting obligation if certain conditions are met and zero tax liability.
• Sickness insurance - The amendment introduces sickness insurance for employees. The social security contribution for employees will therefore now be 7.1%, of which 6.5% is pension insurance and 0.6% is new sickness insurance.
• Tightening of the rules for “special limited" contracts - Tightening of the rules for the exemption from paying insurance premiums in the case of special limited contracts (currently up to CZK 10,000). The limit varies depending on whether the employee has a special contract with one or more employers at the same time. In addition, a notification obligation is introduced for an employee working on the basis of a special contract with several employers in one calendar month, in particular for the purpose of monitoring the limits of the relevant income for the contribution. Failure to comply with this obligation may result in the employee himself being liable to pay insurance premiums for both himself and his employer. More details in our alert HERE.
• Self-employed person's assessment base - The annual assessment base limit for self-employed persons for pension insurance premiums is increased from the current 50% of the partial tax base on income from self-employment before 2024 to 55% from 2024.
• Minimum advances for self-employed persons - The minimum monthly assessment base for self-employed persons is gradually increased, from the current 25% of average wages (for 2023), by 5% for each subsequent year (i.e. 30% for 2024) to a final 40% of average wages from 2026.

VAT/consumption taxes/energy taxes[3]

• VAT rates - There will be two VAT rates - standard (21%) and reduced (12%). In connection with this, the annexes to the VAT Act will be amended.
• VAT on beverages - There is a significant change in the taxation of beverages. When beverages are sold as goods, it will be possible to include drinking tap water and certain liquid dairy products in the reduced VAT rate. Other alcoholic and non-alcoholic beverages will be at the standard rate of VAT. As part of service only the supply of drinking tap water and selected dairy drinks will also be eligible for the reduced rate. The supply of other beverages will be included in the standard VAT rate.
• VAT on transport - Non-scheduled land and water public passenger transport (e.g. line transport of employees of a company, transport of pupils to the theatre, but not taxi services) is moved from the standard to the reduced VAT rate.
• VAT on books - Books meeting the definition of the law will be exempt from VAT with a right to deduct tax, both in physical medium (paper, CD, DVD) and in electronic form, including audiobooks.
• VAT on newspapers, magazines and periodicals will be taxed at a 12% VAT rate regardless of the frequency of publication. The same applies to their electronically provided version.
• VAT on medical and diagnostic equipment - The condition "normally intended for the exclusive personal use of the sick or disabled for the treatment of illness, disability or the alleviation of their consequences" will be deleted. All medical devices and in vitro diagnostic medical devices that are intended for single use are proposed to be included in the reduced rate. Furthermore, the verbal description of some items is being changed, for example, contact lenses, spectacle frames and certain devices will be explicitly listed.
• VAT limitation on the right to deduct for passenger cars - A limit is set on the amount of input VAT that can be claimed on the acquisition of a passenger car that is a fixed asset. This maximum amount of deductible VAT is CZK 420,000 and includes any technical improvements. The limitation does not apply to taxpayers who acquire passenger cars for the purpose of resale (i.e. as goods). However, if there is a change of use and the car originally purchased as goods is classified as fixed assets, the VAT payer must reduce the VAT deduction originally claimed when exceeding the limit.
• Other VAT - Services such as municipal waste collection, transport, disposal and processing, services of authors and performers and other services included in the reduced rate in connection with the introduction of the EET and the Covid-19 pandemic (e.g. cleaning and hairdressing services, shoe and clothing repairs) will be moved to the standard VAT rate. Imports of works of art, collectibles and antiques, supply of firewood, domestic scheduled air transport, supply of cut flowers and decorative foliage will also be moved to the standard VAT rate.
• Excise duty on tobacco products - Excise duty on cigarettes, cigars and cigarillos and smoking tobacco is increased by 10% for 2024 and 5% each year from 2025 to 2027. A new tax on shisha tobacco will be introduced.
• Excise duty on heated tobacco - To be increased by a regular 15% each year for the next 4 years.
• Excise duty on other tobacco products - A new excise duty on other tobacco products (chewing and snuff) will be introduced from 2024. The tax rate will be gradually increased over 4 years in a scheme of 0.4 - 0.8 - 1.2 - 1.7 CZK/g of tobacco contained in the product. 
• Excise duty on tobacco-related products - From 2024, a new excise duty on tobacco-related products will be introduced - the tax rate will increase gradually over 4 years, namely for e-cigarettes in a scheme of 2.5 - 5.0 - 7.5 - 10 CZK/1 ml of refill and for nicotine sachets 0.4 - 0.8 - 1.2 -1.7 CZK/g.
• Excise duty on alcohol - The duty on alcohol is to be increased periodically over a period of 3 years (2024-2026), with the increase to be carried out in a scheme of 10 + 10 + 5%. The amount of security for the tax warehouse operator is also increased.
• Mineral oil excise duty - The exemption for aviation fuel for any domestic transport (including air ambulance) is abolished.
• Mineral oil tax refund - The refund on mineral oils used for metallurgical or mineralogical processes is abolished. However, it will be possible to claim an exemption for part of the mineral oils or to claim a refund of part of the excise duty when used for heat production.
• Green diesel - The procedure for refunding excise duty on green diesel will be simplified.
• Energy taxes - Exemption from tax on electricity, gas and solid fuels when used for metallurgical or mineralogical processes is abolished.

Gambling tax

• The current rate of 35% is maintained for lotteries and technical games. For other games of chance, the tax rate increases from 23% to 30%.
• The minimum tax on gaming machines is increased from the current CZK 9 200 to CZK 13 400.

Real estate tax

• In particular, property tax rates are increased to an average of approximately 1.8 times.
• Municipalities gain more power to regulate the taxation of agricultural land.
• A new inflation coefficient is also introduced.

If this is an area of interest to you, please contact the authors of this article or the advisory team you usually work with.

Authors:

Lucie Říhová

Michaela Felcmanová

Hana Cicvárková

Jevgenija Bajzíková

[1] The changes will generally be effective for taxable periods beginning on or after 1 January 2024.

[2] The changes will generally be effective from 1 January 2024.

[3] The changes will generally be effective from 1 January 2024.