Czech Tax Residency, Income Tax Return, Tax Benefits
Tax Residency, 183 day rule, Business AbroadThere is a difference between Residency (where you live) and Tax Residency (where you pay taxes). This may not be one and the same country. More of often than not, the first and last year of your stay in Czech Republic is not a full calendar year, so your Tax Residency may actually be somewhere else (or, as in the UK with it's funky shifted tax year there is either and overlap or a gap).
Most people have heard of the 183-day rule (you spend at least 183 days in a country - you are Tax Resident there). But the reality is more complex with questions such as: what is your actual place of living? where is the center of your social and economic activity? Where is the permanent establishment of your limited company? Does a DTA offset where you are liable for taxes? If you spent the majority of a year abroad, you may find yourself having to pay the taxes there.
Also, even if you pay Income Taxes in Czech Republic, you still may have to file in your home country (The US, for example). The US foreign income exclusion (of USD 120.000 for 2023) is great, but that does not mean that you don't have to plan. It may be handy to shift income to the next year, or, in the opposite direction, invoice during the current tax year. So, we really need to figure out where you are / will be Tax Resident / liable for taxes.
Many (US) clients have an LLC. An LLC is not necessarily regarded as a company. If you are a sole proprietor (for the IRS), and only member of the LLC, the LLC actually behaves more like a Trade License than an SRO. This has an effect on Tax Returns in both Czech Republic and in the US.
Then there are people with some coconut island LTD or (almost equally bad) Estonian company or some kind of partnership (LLP, PLC). Not registering properly as a person in Czech Republic may mean you will not be Tax Resident in Czech Republic. Or the opposite: they thought the LTD or PLC would be taxed as in the country of registration, but it is not (it is not regarded an independent legal entity or the place of management has shifted to CZ)
Digital Nomads. Definitely, business is shifting to more online and less location-dependent. If you have the possibility to travel around - do it (now). Once you are bogged down with kids, mortgage and a depression-inducing cubicle it's too late. We're accountants. We're not going to tell you it's allright to forget about income taxes for a number of years. It's not. There are blogs that promote 'not being tax resident anywhere at all' or other frivolities - usually that's overly optimistic or fiction at best, or mind-numbingly wrong and impossibe at worst. BTW, there is a difference between 'being tax resident' and 'tax liability'. You may be tax resident somewhere, but still not liable for (a lot of) taxes.
There are benefits in being tax resident in a country with a friendly level of income taxes vs 'dropping off the radar completely'. Many digital nomads find it comforting that they have a home base that they can return to. And you can have one in Czech Republic with a minimal amount of red tape, obligations and taxes.
The number one comment from clients: 'Oh, if I would have known this before, I would not have registered a business / LLC / LTD / PLC / non-profit in country XYZ' or even 'I would not have registered an SRO in Czech Republic'. Talk to us first.
Filing a Personal Income Tax Return in Czech Republic:At the end of the (calendar) year, an Income Tax Return must be filed, roughly in Q1 of the next year. The Tax Return combines income from employment, Trade License, capital gains, rental income, and other sources of local and foreign income. Being Tax Resident in Czech Republic, you have the obligation to file your GLOBAL income - not just what you've made in Czech Republic (this includes income over which taxes have been paid somewhere else according to the Double Tax Agreement).
Income tax on the Tax Base (consisting of all sources of income) is 15% up to cca 1.9M CZK, and 23% on the part over this so-called solidarity tax limit. Then there are Tax Benefits (for yourself, spouse, children) ,factors that reduce the Tax Base (interests on mortgages, life insurance, donations of blood, donations to charity) and tax-exemptions (holding on to investments and property for a number of years until no taxes need to be paid on the capital gains, for example) .
If you had a high income, you may have to pay Income Tax Deposits for the next year, either 2 or 4, depending on the height of the previous year's Income Tax. The exact amounts and payment dates we provide in an additional overview accompanying the Income Tax Return.
The Personal Income Tax Return ParagraphsThe basic layout of a Czech Personal Income Tax Return is simple: 5 paragraphs and a few appendices. Should not be too difficult, right? Well... the devil is in the details and every year we correct and re-file Tax Returns of people who used an online calculator or had some friend fill in the return. Take it from us - Preparing an Income Tax Return for a foreigner, especially the first year and/or with missing registrations, is significantly different than for a Czech national.
Having said this, these are the paragraphs:
- par. 6: Income from Employment - common mistake: the annual income overview provided by the employer is NOT a Tax Return
- par. 7: Income from Self-employment - Trade Licenses, but also other 'free professions' and AirBnB
- par. 8: Capital Gains - common misunderstanding: sold house, shares and made profit. Should go in 8 right? No.
- par. 9: Rental Income - from property located in Czech Republic only
- par. 10: Other income - Dividends, Stock options, Crypto, profits on property and sporadic income without element of (monthly) repetition
Then there may be a DTA (Double Tax Agreement) for the avoidance of double taxation on foreign income or income generated abroad. It is sometimes not so easy and obvious where taxes ought to be paid. The end result may be that you are not to pay any taxes in Czech Republic. No online calculator will do this (correctly) for you.
Even more details: Czech Personal Income Tax Return
If you are considering or have a Trade License and did not read the article on the 3 accounting methods yet - do it first
Tax BenefitsThere are factors that reduce your taxbase and then there are benefits that directly reduce the amount of taxes to be paid (Tax Credits).
Factors reducing your tax base:
- Interests on Mortage payments - 150.000 CZK max.
- Pension Insurance payments - 24.000 CZK Max
- Donations to Charity - various
- Donation of Blood - 3000 CZK
- Each Tax payer - 30.840 CZK
- non-working spouse - 30.840 CZK
- Child Benefit - 15.204, 22.320, 27840 CZK
- Student - 4020 CZK
- Pre-school / Daycare - 16.200 CZK
Extending a Business VisaNote that if you have to extend a Business Visa you need a certain amount of minimum income. For one person, using the 60/40 method, it would mean a Annual Revenue of at least 660.000 CZK. If you do not have that kind of Revenue then you have to use the Real Expense method (Annual Revenue at least 265.000 CZK).
Often that is not enough: in case your actual housing costs are higher than the nominal sums and you support more people in your household Your Revenue needs to be significantly higher to get your visa(s) extended. We have a precise calculation sheet that will calculate exactly how much Revenue you will need.
For more information on Income, Taxes and Visas Book a Consultation by ZOOM / Skype / Whatsapp / Phone or email.