Tax System of the Czech Republic

In its main features, the tax system of the Czech Republic is similar to the systems of developed - especially European - countries. The tax burden, defined as a ratio of tax revenue (excluding compulsory social and health insurance) to gross domestic product, was 22.8 per cent in 2000 (according to OECD methodology). Tax revenue including compulsory social and health insurance to GDP amounted to 40.7 per cent. The tax revenue is divided roughly equally between indirect and direct taxes (53.3 : 46.7 in 2000).

The main direct taxes

Personal income tax has a progressive rate ranging from 15 to 32 per cent in four brackets. The tax is imposed on salaries and wages of employees and on profits of the self-employed. The wage tax is withheld by the employer. The self-employed make prepayments and an annual settlement. Every taxpayer may deduct from the tax base several allowances: basic, for a spouse, for children. Dividends and interest income are taxed at a 15 per cent withholding tax rate.

Corporate income tax has a rate of 31 per cent. For investment companies and investment and pension funds, the rate is 20 per cent. Legal persons make prepayments followed by a settlement in the next year. Each taxpayer may choose linear or accelerated depreciation. The terms of depreciation range from 4 to 30 years. There is also a special incentive: 10 per cent of a newly purchased investment may be deducted from the tax base. A company may credit half of the tax withheld on its dividends against its own tax liability. There is possibility to obtain tax holidays of up to ten years for large new investments.

Real estate tax is levied on land and buildings. The tax on land depends on the quality of particular land, its location and use. The tax on buildings is not based on market value but on physical characteristics (according to the appertaining law), with its price being used only when it is higher than the price computed according to the law. The taxation period is one calendar year.

Road tax is imposed only on vehicles used for business purposes. Vehicles used exclusively for personal purposes are exempt. Tax rates are assessed as annual fixed rates. For passenger cars, the rate depends on cylinder capacity and for trucks on the number of axles and on weight. There is also a special highway fee. This fee is paid by anyone who uses a highway. The rates of inheritance tax and gift tax range from 0.5 to 40 per cent. These depend on the relation between inheritor/donor and acquirer (heir/donee).

There are also several administrative and local fees.

The main indirect taxes

Value added tax is charged on most supplies in the territory of the Czech Republic as well as on imported goods. The tax has a basic rate of 22 per cent and reduced rate of 5 per cent. The basic rate is imposed on the majority of goods, excluding, e. g., food and goods for social and health care purposes and on some services. The reduced rate is imposed on the majority of services, excluding, e.g., advertisements, marketing studies or certain tourism-related services. Exported goods are exempt from tax with possibility of claiming a VAT refund paid on input. Financial services are also exempt. The registration threshold for mandatory registration is set at 3 mil. CZK of a taxpayer’s annual turnover. The tax is paid monthly or quarterly depending on the turnover of the taxpayer.

Excise duties are imposed on mineral oils, liquors, wine, beer, and tobacco products. Taxes have fixed rates per physical unit (except cigarettes). The tax is paid when goods are produced or imported to the Czech Republic.

Exporters may claim a refund. The taxation period is one month, with big producers paying the tax daily.

Customs duties at an average effective rate of 1.1 per cent (in 2000) respect international contractual obligations of the Czech Republic.

Real property transfer tax has a rate of 5 per cent. The tax base is set as in the case of real estate tax. The tax is paid by the transferor (seller).

Other indirect taxes include, e.g., environmental fees for air and water pollution and waste deposit fees.