Last updated on 7 de April de 2023
The Czech Republic is the richest country in the former Eastern bloc. And it manages to attract a very high volume of foreign investment. As a result, it arouses the interest of many people. In this article we analyze the taxes of the Czech Republic, one of the secrets of its economic success.
- Taxes on Earned Income
- Capital Income Taxes
- Corporate Tax
- Real Estate Transfer Tax
The Czech Republic is a perfect example of what a country can achieve economically if actions are taken to promote long-term growth, improve the well-being of the population, and have its public finances in order.
A growing economy and a very stable currency have brought the Czech Republic to the attention of many people even as a destination to relocate to.
The Czech Republic uses its own currency, the Czech Koruna (CZK), having declined to join the eurozone. And it has used its monetary sovereignty very well.
The country’s financial situation is much better than that of the euro zone. And the Czech Koruna has been one of the strongest currencies in the world over the past 20 years.
Throughout this analysis of taxes in the Czech Republic, we will look at tax amounts in both Czech Koruna as well as their equivalent in US Dollars and Euros. For that, we will use an approximate exchange rate of $1 = €1 = CZK 25.
Taxes on Earned Income
Labor income in the Czech Republic is subject to both social security payments and income tax:
Everyone working in the Czech Republic must participate in the country’s social security system. Both employees and employers will have to make contributions, and these will depend on the salary level of the employee.
The maximum social security base is 1,935,552 CZK ($77,442/€77,422) per year. This means that anything we earn above that amount will not be subject to social security contributions.
Workers must pay 11% of their gross salary to the social security. Of this percentage, 6.5% goes to the pension system and 4.5% to healthcare insurance.
When it comes to employers, they must pay social security contributions equivalent to 33.8% of the employee gross salary. This percentage includes payments to the pension system, healthcare insurance, sick leave and unemployment insurance.
The following table summarizes all payments made to the social security in the Czech Republic:
As you can see, contributions to the Czech social security system are overall quite onerous.
Earned income in the Czech Republic is also subject to income taxes, which are simple to understand.
Income tax is calculated on the tax base. The tax base is simply the gross salary minus certain deductions.
The most important deduction is the interest we pay on our mortgage as long as we live in that home. The maximum amount that can be deducted is 300,000 CZK ($12,000/€12,000) for mortgages signed before 2021, and 150,000 CZK ($,6000/€6,000) for mortgages signed in or after 2021.
The Czech income tax has the following brackets:
- 0 to 1,935,552 CZK ($0-$77,422/€0-€77,422): 15%
- Over 1,935,552 CZK ($77,442/€77,422): 23%
Note that the top marginal rate of 23% kicks in when social security contributions end. As a result, the portion of our salary subject to social security contributions will only get at a rate of 15% for income tax purposes.
Finally, from the resulting amount we will subtract the applicable allowances.
Thus, all taxpayers enjoy a tax allowance of 27,840 CZK ($1,114/€1,114). Additionally, the first child comes with an allowance of 15,204 CZK ($608/€608), the second 19,404 CZK ($776/€776), and the third and subsequent children 24,204 CZK ($968/€968) each.
There are more allowances for those whose spouse earns less than a certain amount, or who have some type of disability.
Total Tax Burden on Earned Income
In order to assess the total tax burden on labor income, we will compare the total employment costs for a company with the employee’s net salary. This will indicate how much money is going to the tax authorities one way or another.
For this exercise, we will focus on individuals who are unmarried, have no dependents, and do not take advantage of any optional allowances. We will see the numbers for various income levels:
It is worth highlighting the total tax burden on low, middle, and upper-middle incomes is practically the same, hovering around 40%. This is due to the high social security contributions.
The effective tax burden goes down for those who enjoy very high incomes, indicating that the system is in fact regressive.
Interestingly, however, economic in equality in the Czech Republic is smaller than in most developed countries.
Capital Income Taxes
Let us analyze what taxes apply to income from savings and investments in the Czech Republic:
Dividends, Interest & Capital Gains
Income obtained in the form of dividends or interest will be subject to a flat tax rate of 15%, regardless of how much we make.
Most realized capital gains will also get taxed at a flat tax rate of 15%. The exception are capital gains obtained with the sale of real estate if we have owned for at least 5 or 10 years (depending on when we purchased it), or in which we have lived for a minimum of 2 years. In those situations, the profits would be tax-free.
Rental income is also subject to a flat tax rate of 15% but deserves to be analyzed separately because we can choose on what amount we will pay taxes.
One option is to calculate our net real estate income before taxes, starting with what we have received in rents and subtracting all the expenses associated with the ownership and maintenance of the property (mortgage interest, insurance, rates, repairs, etc.).
The other option is simply to reduce the total amount we have received in rents by 30%. Consequently, on a gross rental income of $10,000/€10,000, we would pay 15% tax on $7,000/€7,000. The effective tax rate if we choose this option is 10.5%.
In the Czech Republic, the general corporate tax rate is 19%. Such rate applies to all corporations, regardless of their size or economic activity.
As a result, Czech corporate tax is lower than that of all major European countries, including Spain (25%), France (31.3%) and Germany (29.8%). This makes the Czech Republic a very attractive destination for companies to set up shop.
VAT in the Czech Republic is levied on the consumption of goods and services and has 4 different rate:
The general VAT rate is 21% and applies to all goods and services that are not subject to a reduced tax rate.
The first reduced rate is 15% and used for many purchases, including some foods, water supply, hotels, bars and restaurants, healthcare services, as well as cultural events.
The second reduced rate of 10% is used for certain foods, pharmaceutical products, the press and books, including e-books.
Finally, financial services, including insurance policies, and international transportation are exempt from VAT.
Real Estate Transfer Tax
From 2021, taxes on the purchase of a home in the Czech Republic are effectively 0%. Prior to that, real estate transactions were taxed at 4% of the transaction value.
It should be noted that, along with the abolition of the real estate transfer tax, the Czech parliament also reduced the amount of mortgage interest that can be deducted from income tax, from CZK 300,000 ($12,000/€12,000) to CZK 150,000 ($6,000/€6,000).
Additionally, if we buy an investment property and sell it with capital gains before 10 years, we will have to pay 15% tax on the capital gain. Prior to 2021, capital gains were tax-exempt after only 5 years.
These income tax reforms have the goal of offsetting the potential negative consequences of the elimination of the real estate transfer tax.
The Czech Republic has a very attractive tax system if we compare it against other developed countries.
Taxes on earned and capital income, as well as corporate profits, are much more advantageous. That encourages people to work, save, invest, and start businesses. It also encourages companies of all sizes to continue to grow.
Despite these attractive tax rates, or precisely because of them, the Czech Republic has less unemployment, inequality and debt than Southern European economies.
Finally, we will see a chart of the level of public debt in Czech Republic relative to the size of its economy:
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And if you want to read about the Czech economic success, check out this post:
Economy of the Czech Republic – 5 Lessons to Learn