Tax and social security implications of assignment to/outside the Czech Republic
Fučík & partneři
ff@fucik.cz
+420 296 578 300
14.9.2011
The purpose of this article is to provide the internationally assigned individuals with a comprehensive overview of the main aspects of the personal income taxation and social security and health insurance (further the “SSHI”) in the Czech Republic (further “CR”) and implications of the two basic assignment structures from the Czech tax legislation point of view.
1. Overview of the Czech personal income tax
1.1 Tax residency
The scope of personal taxation in the CR is determined by the tax residency status, on a calendar year basis. We below outline the tax residency rules:
(i) According to the Czech tax legislation, an individual is considered a Czech tax resident, if
a) he either has a permanent residence in the CR (within the meaning of place of abode where he intends to reside permanently) AND/OR
b) spends 183 days or more in the CR in a calendar year (i.e. he has an habitual abode in the CR).
(ii) Should an individual be also regarded as a tax resident in another country based on the other country’s domestic law, the relevant double tax treaty (“DTT”) concluded between the two countries determines his final tax residency status (“tax domicile”).
(iii) The OECD Model Tax Treaty and also the most of DTTs stipulate the following tie-break rules:
a) An individual is regarded as a tax resident in a country where he has a permanent home available to him. Should he have a permanent home (a place for living) in both countries, he should be regarded as a tax resident of the country with which his personal and economic relations are closer, i.e. where he has his "centre of vital interests".
b) If the state in which the individual has his centre of vital interests cannot be determined, or if he has no permanent home available to him in either state, he shall be deemed to be a resident of the state in which he has an habitual abode (the length of time is not specified, it is determined based on local legislations).
c) If he has an habitual abode in both states or in neither of them, he shall be deemed to be a resident of the state of which he is a national.
d) If he is a national of both states or neither of them, the competent authorities of the states shall settle the question by mutual agreement.
Czech tax residents are subject to Czech tax on their worldwide income. Czech tax non-residents are subject to tax on their Czech-source income only, which is specifically defined for each type of income. Double taxation is avoided either by applying a foreign tax credit or by exemption of foreign source income in accordance with the respective DTT. In the absence of such a treaty, the foreign tax paid can be deducted (under certain conditions) from the relevant income.
1.2 Types of taxable income – partial tax base
According to the Czech tax legislation the following income is taxable in the CR:
(i) Employment income– includes mainly salaries, wages, bonuses, other compensation of a similar nature and most benefits in kind (e.g. company car provided for both business and private purposes). The tax base for employment income (so called “super gross income”) equals the sum of the gross income of the employee and includes also the employer’s portion of mandatory Czech or fictive Czech SSHI contributions paid in the respective tax period.
(ii) Self-employment income– income from business activities and professional services, less deductible expenses.
(iii) Income derived from capital(e.g. dividends, interests) – dividends and interest derived by Czech tax residents from foreign sources are taxed in the individuals’ tax return. Czech-source dividends and interests are, in general, subject to withholding tax at source and do not need to be included in the annual tax return.
(iv) Rental income –income from lease of real estate and flats or movables, less deductible expenses.
(v) Other income(e.g. sale of securities, real estate). Capital gains realized from the sale of real estate or personal property not acquired for resale are generally exempt from income tax if certain conditions and limits required by the Czech tax law are met. The tax base for other income consists of non-recurring income, less deductible expenses.
Based on the current wording of the Czech Income Taxes Act, income from current of former employment, income for work performed by members of co-operatives, partners and executives of the limited liability company and also the remuneration of members of statutory and other organs of the legal entities is usually considered as employment or self-employment income.
Instead of deducting actual expenses (costs), taxpayers engaged in certain business and rental activities may choose to deduct a percentage of gross revenues as lump-sum costs. The percentage of lump-sum costs varies depending on the individual’s activity and is set by the legislation.
Losses incurred in self-employment or rental activities may be carried forward for five years and used as a deduction against investment, self-employment, rental or other income. They cannot be applied against employment income.
1.3 Tax rate, tax deduction and tax discounts
The flat tax rate of 15% is applicable for the taxation of individuals in the CR.
Examples of main expenses that may be deducted from the tax base:
(i) Amount of interest for a mortgage or a construction saving loan of up to CZK 300,000 paid in the respective taxable period, if the mortgage / loan was used for financing personal housing needs. Special conditions for application of this deduction are determined.
(ii) Contributions up to CZK 12,000 made to supplementary pension insurance schemes and contributions up to CZK 12,000 made to life insurance schemes that comply with the special requirements determined by the Czech tax law.
(iii) Giftsmade to certain entities and for certain purposes, if amounting to at least 2 % of the tax base or CZK 1,000. The maximum amount to be deducted is 10 % of the tax base.
If certain conditions are met, the individuals may apply the following tax reliefs, e.g.:
(i) Taxpayer’s tax relief of CZK 23,640.
(ii) Spousal tax reliefof CZK 24,840 if the spouse lives in the same household with the taxpayer and the spouse’s annual income does not exceed CZK 68,000.
(iii) Tax relief for partially disabled persons is CZK 2,520 and for fully disabled persons CZK 5,040.
(iv) Tax relief for each dependent child is CZK 11,604.
(v) Student tax relief is CZK 4,020.
The tax reliefs are available to Czech tax non-residents if their Czech-source income accounts for at least 90 % of their total annual worldwide income. This rule does not apply for the general personal tax relief that can be utilized in all cases.
1.4 Filing obligations and payment of tax
The tax year for individuals is the calendar year and the filing deadline is 1 April of the following year. Extensions may be granted until 1 July if the tax return is prepared and filed by a tax advisor or a special request is filed with the Czech tax authorities before 31 March. Where individuals must include foreign-source income in their tax return, the deadline for filing may be extended up to a maximum of 1 November.
The tax liability is due within the deadline for filing of the Czech tax return. The income tax advances need to be paid during the tax period. The amount and the frequency (quarterly/semi-annually) of tax advances is based on the last known tax liability. No tax advances are payable by those who receive only employment income subject to payroll tax withholdings.
1.5 Payroll
The monthly payroll tax withholdings are due from the employment income. If the individual is subject to Czech SSHI system, the SSHI contribution relating to the above mentioned income should be also withheld.
Annual reconciliation of the withheld payroll tax prepayments should be done on the employee’s request (if there is no liability to file personal income tax return). If such request is not made, the prepayments are considered final payroll tax liability of the employee.
2. Overview of the Czech SSHI obligations
Participation in the Czech SSHI system is required for individuals who work in the CR except foreign nationals who are, according to the EU social security legislation or a totalization agreement, contributing to their home country social security system.
The company’s part of the SSHI contributions is calculated as 34 % (30.5 % in case of an executive head) of the individual’s income which is subject to SSHI. The individual’s contributions amount to 11.5 %. The maximum annual assessment base is CZK 1,781,208 for 2011.
The social security contribution consists of sickness insurance, pension insurance and contributions to state employment policy. The contributions paid on behalf of executive head are lower as the executive head is not sickness insured.
3. Assignment structures
The scope of personal income taxation in the CR depends also on the structure of assignment of an individual to/outside the CR/local employment/other relationship with the company.
Generally, there are two basic assignment structures:
- Employment by one company and secondment to/outside the CR under a management services agreement (“MSA”);
- Employment by one entity and assignment to/outside the CR under a hiring out of labour agreement (“HOLA”).
The basic implication of those assignment structures are in the case of assignment to the CR as follows:
3.1 MSA structure:
- The assigned employee (further “the expatriate”) is legally employed and remunerated by his/her legal employer (further “the foreign company”).
- The expatriate works under instructions and supervision of his/her legal employer and is not subordinated to the Czech company.
- The expatriate is obliged to register for the personal income tax purposes and settle his/her Czech tax liability via filing annual personal income tax return. The Czech company is not obliged to withhold monthly payroll tax from the expatriate’s income.
- An obligation to register a permanent establishment of the foreign company in the CR can be created.
3.2 HOLA structure:
- The expatriate is legally employed and remunerated by the foreign company.
- The expatriate works under instructions and supervision of the Czech company and would be subordinated to a superior employee of the Czech company.
- The Czech company is obliged to compute and remit the monthly payroll tax withholdings from the expatriate’s income.
- The probability that a permanent establishment of the foreign company is created would be minimized.
Further implications have to be verified based on the specific circumstances of each assignment to/outside the CR (e.g. need of a special "employment agency licence” issued by the Czech Ministry of Labour and Social Affairs, etc.).
Ing. Kateřina Hrůzová
katerina.hruzova@fucik.cz
http://www.fucik.cz/en/actual-issues/14/tax-and-social-security-implications-of-assignment-to-outside-the-czech-republic/