Tax and Accounting News in Connection with the Consolidation Package
On December 12, 2023, Act No. 349/2023 Sb., the so-called Consolidation (or Recovery) Package, was published in the Collection of Laws („Sbírka zákonů České republiky“). The legislation, which is a part of the public finance consolidation project, changes 65 legal regulations, among others in the areas of taxation, accounting and auditing. The Act comes into effect on January 1, 2024 (with some exceptions). We are bringing you a brief overview in this edition of our newsletter.
- Changes in income taxes and in social and health insurance payments
Cancellations of and changes in personal income tax exemptions
In the field of personal income tax, several types of income are no longer going to be tax exempt. From 2024, for example, the general tax exemption of income in the form of prizes from a public competition, from an advertising or sports competition, as well as a state contribution to building savings, exchange rate gains from exchanging money from non-business accounts held in a foreign currency or winnings from lotteries, raffles and gambling games will be abolished (under the current rules, they are exempted up to CZK 1 million). However, this does not mean that these types of income will be taxed “from the first crown”, as a general limit of CZK 50,000 is being introduced in the group of the so-called other incomes (which will include, among other things, these incomes) for the tax period during which individual types of income will be exempt from personal income tax. Among other things, this rule increases the limit of tax-exempt income arising from the so-called occasional activities from CZK 30,000 to CZK 50,000 per tax period.
A fundamental innovation is the limitation of tax-exemption of income from the paid transfer (sale) of a share in a business corporation or a security. Effective January 1, 2025, income from the sale of a share in a business corporation or from the sale of a security (if the standard the so-called “time tests” are met) will be exempt from personal income tax only up to the amount of CZK 40 million in the tax period. Therefore, from January 1, 2025, if the taxpayer receives income from the sale of a share, or from the sale of a security, of more than CZK 40 million in the tax period, the income exceeding this limit will be taxed. However, taxpayers will be allowed to apply the purchase price of a share or security (or its part) as an expense, or to apply the market value of these assets as of December 31, 2024, as an expense. Therefore, in fact, the increase in the value of shares and securities will be taxed from January 1, 2025.
Adjustments in the field of employee benefits
Substantial changes are taking place in income of natural persons from dependent activities. First of all, the approach to meals is changing in the sense that both meals in non-monetary form (including meal vouchers) and in monetary form will be tax-exempted only up to the limit established by law . So far, this ceiling (in 2023 it is CZK 107.10 per shift) is only used for the cash allowance for meals. This means that if employers provide their employees with meals (in any form), the total value of which exceed the ceiling, the above-limit value of the meals will be subject to income tax, including social and health insurance payments. According to the text of the explanatory note, the value of meals will not include the provision of small refreshments (for example, bowls of fruit that are available to employees at the workplace and at work meetings) or meals during work meetings.
Other changes concern the so-called leisure benefits, i.e. non-monetary benefits that the employer provides to the employee in the form of the possibility to use educational and recreational facilities, contributions to cultural or sports events or printed books, contributions to the purchase of goods or services of medical, therapeutic and other nature. Currently, these non-monetary benefits are exempt from personal income tax without limits (the only exception is the provision of recreation, which is limited to the amount of CZK 20,000 per tax period). Under the new rules, the tax exemption of these benefits will be limited to the amount equal to a half of the average salary, i.e. for the year 2024, the amount of CZK 21,983.50. The so-called leisure benefits exceeding this limit will be subject to personal income tax and social and health insurance payments.
As regards personal income taxes, some tax exemptions are also going to be abolished, for example the abolition of the tax exemption of non-monetary donations provided from the cultural and social fund, as well as the abolition of the exemption of income up to CZK 500,000 provided as a social assistance to employees to overcome their extremely difficult circumstances.
The consolidation package introduces further support for electromobility, which is manifested in employee income taxation by the fact that effective 2024 the provision of the so-called zero-emission vehicles will be subject to lower taxes. If an emission-free vehicle is provided to an employee for private use free of charge (i.e. vehicles that use only electricity or hydrogen as fuel, or another vehicles whose operation has zero CO2 emissions), the employee’s non-monetary income will be valued at only 0.25% of the purchase price of the car including value added tax.
Changes regarding social security contributions of employees and the self-employed
Effective January 2024, the consolidation package introduces a sickness insurance premium rate of 0.6% of the assessment base (gross wage). This means that 11.6% of the gross salary will be deducted from the employee’s insurance premium (currently, it is 11%).
As a part of the consolidation package, changes have also been introduced regarding the health insurance payments of employees working based on agreements to perform a job. The amendment of law is scheduled to come into effect on July 1, 2024. There will continue to be an income limit of an employee under an agreement to perform a job with one employer (today CZK 10,000; under the new rules calculated as 25% of the average salary rounded down to five hundred CZK, i.e. in 2024 it will be the amount of CZK 10,500). In addition, there will be a new ceiling of the employees’ earnings covering all their agreements to perform a job in one month. The new ceiling should be 40% of the average salary (with the same rounding rule), that is, 17,500 CZK per month. Therefore, if employees earn more than this ceiling under agreements to perform a job, all their income from agreements to perform a job will be subject to health insurance payments. However, these rules are expected to change before the new regulation takes effect. We will make sure to keep you up to date.
In the field of insurance payments, there are also changes for self-employed persons. The assessment base for social security payments will increase from the current 50% of the tax base to 55%. There is also an increase in the minimum social security payments, as the minimum assessment basis will increase by 5 percentage points annually in the next three years, up to a target limit of 40% of the average salary per month. In 2024, this change will be reflected by the fact that the minimum advance for pension insurance of the self-employed will increase from the current CZK 2,944 to CZK 3,852 per month.
Other changes in personal income tax
Effective 2024, there will be changes in personal income tax rates. The existing rates (15% and 23%) remain. However, the threshold from which the 23% tax rate will be applied is changing. The current threshold is equal to 48 times the average wage (i.e. in 2023, it is the amount of CZK 1,935,552), the new threshold will be 36 times the average wage (in 2024 it will be the amount of CZK 1,582,812).
There are also adjustments in the so-called deductions from the tax base (for natural persons, this is the non-taxable part of the tax base) and tax discounts. The Consolidation Package will cancel the possibility to deduct from the tax base membership fees paid by members of trade unions, and payments for examinations verifying the results of further education.
Effective 2024, the so-called student discounts on personal income tax, and tax discounts for placing a child in a pre-school facility (the so-called kindergarten fees) will be abolished. There is also a new significant limitation of the tax discount for a spouse (or a registered partner) – a new condition for applying the tax discount has been introduced: the taxpayer’s child who has not reached the age of 3 also lives in the joint household with the taxpayer. Therefore, under the new rules, the tax discount for a spouse will only be limited to families with small children.
The possibility of excluding the so-called unrealized exchange rate differences from the tax base
Effective 2024, personal and corporate income taxpayers will be able to temporarily exclude from their income tax bases the so-called unrealized exchange rate differences (in the form of exchange rate gains and exchange rate losses). These differences relate mainly to receivables and debts and are created as a result of currency conversion as at the end of the accounting (tax) period. From the point of view of accounting regulations, they affect the economic result of the period, and – under the current rules – they also affected the tax base.
Taxpayers will now have the option to temporarily exclude the so-called unrealized exchange rate differences from the tax base and to include them in the tax base (for example, taxing exchange rate gains) only when they are realized, i.e. in particular, when a claim or debt is paid. However, the condition for making use of this option is that the taxpayer registers in time for the exchange rate exclusion regime. The time limit of signing up for this regime is relatively short – within 3 months after the start of the tax period. Therefore, if a taxpayer wants to use this regime already for the tax period of the calendar year 2024, it will be necessary to apply in the first quarter of 2024, i.e. at the time when it will not be possible to estimate the development of exchange rates towards the end of the year. However, once the taxpayer has signed up for the exchange rate exclusion regime, it is no longer possible to opt out during the year – voluntary withdrawals will only be possible after the end of the second tax period following the taxpayer’s delivery of a notice of withdrawal from the exchange rate exclusion regime to the tax administrator. This regime will also terminate in situations established by law (for example, as a result of company transformations).
Changes in corporate income tax and other adjustments to general rules
In corporate income tax, the general tax rate will increase by 2 percentage points, i.e. from the current 19% to 21%.
Effective 2024, still wine provided as the so-called advertising and promotional item will no longer be tax-deductible costs.
The consolidation package also affects tax depreciation of tangible assets. The possibility of applying the so-called extraordinary depreciation, which could be applied to new property acquired in the last four years, is going to be significantly limited. The essence of these depreciations was faster depreciation of certain assets. It will now be possible to apply extraordinary depreciation only to emission-free vehicles purchased between 2024 and 2028.
Furthermore, a limitation of tax-deduction of costs on road motor vehicles of category M1 (i.e. passenger cars) is introduced, in the amount of CZK 2 million. Therefore, if a taxpayer purchases such vehicle after January 1, 2024, for an amount exceeding CZK 2 million, the tax application (both from the point of view of income tax and from the point of view of value added tax – see below) will be based on the maximum price of CZK 2 million.
There are other significant changes in the field of income taxes, such as the simplification of reporting income flowing abroad to the so-called tax non-residents, the abolition of the institute of the so-called payer’s treasury, and several other adjustments.
Extending the effect of legal regulations on tax measures in connection with the war in Ukraine
The Consolidation Package has extended to 2023 the effect of tax measures which were adopted in 2022 by Act No. 128/2022 Sb., in connection with the armed conflict in the territory of Ukraine. In 2023, taxpayers will continue to be able to deduct from their tax bases donations made to Ukraine. The increased 30% limit for deducting donations from the tax base has also been extended. The increased limit applies to all applicable donations, i.e. not only those related to Ukraine.
- Accounting News
The consolidation package (quite unexpectedly) has also changed the existing accounting regulations. As part of the amendment to the Accounting Act, which will be accompanied by changes in the so-called accounting decrees, the following main changes have been introduced:
Changes in the definition of net turnover
The amendment to the Accounting Act has changed the concept of the so-called net turnover. Under the old rules, for the purposes of accounting regulations, turnover was understood as the amount of total revenues of the accounting unit; under the new rules, only revenues from the sale of products and goods and from the provision of services will be included in turnover. This will result in a reduction in reported accounting turnover for several accounting units. This fact may have very specific effects on the classification of accounting entities into the categories of micro, small, medium, and large accounting entities (these categories are associated with different duties), on the duty to audit financial statements (for small accounting entities), etc.
We would also like to mention that for some accounting units (for example, financial institutions and non-profit organizations), net turnover will be defined differently.
Possibility of accounting in foreign currency
Effective 2024, the Accounting Act introduces the possibility to keep accounts in Euros, US Dollars or British Pounds. This possibility does not apply to all accounting units, but only to the ones where these types of currency are the so-called functional currency. A functional currency means the currency of a primary economic environment in which the accounting entity operates. Therefore, if the accounting unit in question has, for example, the majority of its inputs and outputs in Euros, effective 2024 the accounting unit will be able to decide to keep its accounts not in Czech Koruna (as before) but in Euros. Once a decision has been made to keep the accounting records in a foreign currency, it will not be possible to switch back to Czech Koruna on a voluntary basis. Czech Koruna will become the accounting currency for this accounting unit only if the currency of the primary economic environment changes, in other words, if the primary currency affecting such entity is no longer Euro, but the Czech Koruna.
The ability to keep accounts in a foreign currency is a significant innovation, the correct application of which has a number of wider implications (for example, tax implications) and will require faultless support from the accounting software.
Sustainability Reporting (ESG)
The amendment to the Accounting Act has introduced the first phase of implementation of the legislation on making of and verification of sustainability reports. The purpose of these reports will be to provide information needed to understand the sustainability impacts of the entity’s activities and to understand the impact of sustainability on the development, performance and position of the entity. In the first phase, the mandatory preparation of sustainability reports applies to large entities (business corporations) – the criteria include, for example, exceeding the average number of 500 employees per accounting period. In the next stages, the duty will be expanded to apply also to other accounting units.
Income Tax Report
Like the report on sustainability, the new report on income taxes will also affect large entities (business corporations) – here the criteria include reaching an annual turnover of CZK 19 billion. Other conditions stipulate that the entity has a foreign branch or a foreign permanent establishment during the accounting period. The reports drawn up by the entities will provide information about, among other things, the cost of income tax and about the amount of tax paid by the accounting entity.
- News in the field of VAT and excise duties
In the field of value added tax, there is a parametric change in tax rates. The basic VAT rate remains at 21%, but the existing two reduced rates (i.e. 10% and 15%) will be merged into a single 12% rate. As a result, there will be a shift in the tax burden of supplies which were taxed at lower rates.
In addition, some supplies have been reclassified to other tax rates. For example, some services that were previously tax-advantaged (in connection with the planned start of the 3rd and 4th phases of the EET) have been reclassified to the basic VAT rate. Under the new rules, for example, repairs of shoes, of leather products and of bicycles, as well as cleaning works, and draft beer will be taxed at the basic VAT rate. For example, firewood and non-alcoholic beverages (except for drinking water from tap water and some liquid dairy products) have also been transferred to the basic VAT rate.
Effective January 1, 2024, a new type of tax exemption (with the right to input tax deduction) is also being introduced in the form of the supply of a book and the provision of a similar service (the so-called electronic books). These services will not be subject to value added tax.
In connection with the tax restriction on the use of passenger vehicles of category M1 (see the previous section), from 2024 the right to deduct value added tax for these cars will be limited to the amount of CZK 420,000 (i.e. CZK 2 million x 21%).
According to the transitional provision relating to cars, the new regulation will apply to VAT deductions incurred after the amendment comes into force. However, if the proper deposit is paid by the end of 2023, the deduction could exceed the amount of CZK 420,000. Of course, it is necessary to accept the normal business conditions in the given sector, in order to avoid abuse of the law.
In the field of excise taxes, there are mainly parametric changes in tax rates (regular gradual increases in excise taxes on cigarettes, smoking tobacco, cigars, alcohol, etc.), as well as the taxation of other tobacco products and the limitation of exemptions in some cases (for example, the cancellation of the tax exemption of air fuel for domestic flights).
- Other news
The Consolidation Package will introduce changes in several other areas, such as:
- increase in property tax rates by up to 80% and regular “valorization” of this tax using the so-called inflation coefficient
- cancellation of stamps
- restrictions in creating the cultural and social fund (“FKSP”), etc.
The scope of the amended legislation and the complexity of the changes resulting from the Consolidation Package are significant. If you are interested in detailed information about the impact of the changes, please do not hesitate to contact our VGD team.
At the moment, the ceiling for 2024 is expected to be CZK 115.50 per shift. However, its final amount will be based on travel reimbursement rates, and they will be officially announced in December 2023.