SUPERCEDED

II.   Personal Income Tax

Graduated tax is based on taxable income (taxable base).

1998

Effective from 1998 optional tax rates can be used for certain foreign source income:

25% dividends, interest, other gains on securities

20% winnings from lotteries, betting, certain prizes and sporting competitions winnings etc.

A tax payer may deduct from the Czech tax liability foreign taxes up to the amount of tax which corresponds to the foreign source income. Double tax treaties overrule domestic legislation.

1997

1997 and 1998

* Unless spouse's taxable income exceeds Kc 32,040 (Kc 28,800 in 1997).

From 1998 interest paid on mortgage and construction savings loans are deductible in calculating the tax base.

The taxable income is the amount by which a taxpayer's income exceeds the tax deductible expenses which are incurred in order to generate, assure and maintain income (unless the Act specifies otherwise in the case of particular types of income).

Taxable income includes:

• Wages, salaries and director's fees, including benefits-in-kind (with some exceptions, such as company paid housing for those "traveling away from home"), and expense reimbursements over the statutory allowances.
• Personal benefit for the use of an automobile is defined as 1% per month of the cost including VAT, if provided free of charge to the employee
• Business income from independent gainful activity (self-employment) including: farming, trading, professions. Royalties are deemed to be business income unless from inherited rights
• Income from capital, including: dividends, interest, insurance policies (in excess of contributions)
• Leasing income
• Other income

The following income is either excluded or exempt from taxable income:

• Non-Czech income of foreign experts (see below) staying in the Czech Republic, even if they stay more than 183 days
• Sale of house or flat (if it was the principal residence for the two prior years)
• Sale of other real estate if owned for at least 5 years
• Sale of movable assets (except motor vehicles, aircraft, ships - if held more than one year)
• Both movable and immovable assets transferred from a trade or business to personal use, if held more than 5 years after their transfer from business use property (2 years in respect of houses and flats which were the principal residence for the prior two years)
• Sale of securities if held more than 6 months (1996 3 months) and is not held for a trade or business purpose. Securities include shares in an a.s. but not ownership in s.r.o. / partnership / cooperative.
• Income from social security, including similar mandatory foreign insurance (excluding pensions in excess of Kc 120,000 in a calendar year)
• Subsidies and scholarships from public funds and foundations (excluding payments similar to income or replacing income)
• Payment of benefits in respect of personal insurance but not benefits payable to insured persons on attainment of a certain age when the benefits exceed the premiums paid
• Annuities in excess of the premium paid
• Interest income from state bonds issued prior to 1/1/1997 (interest income from state bonds issued after 12/31/1996 is subject to withholding tax)
• For foreign residents and foreign legal entities income from the sale of moveable property is limited to sales from a permanent establishment.
• Profit on liquidation of partnerships.
• Interest paid by the tax and social security offices due to their errors.
• Subsidies from the state and local government paid for the purpose of buying or renovating assets.
• Income from shares or participation certificates under a special legislation act, by inheritance, restitution or donation of real estate or movable assets, or of a property right
• Certain compensation received for damages
• Interest from bonds issued abroad by taxpayers whose registered office is in the Czech Republic (if it was non-exempt, it would be a Czech source income subject to Czech withholding tax)
• Profit or any excess of income over expenditure, resulting from the liquidation of a bankruptcy estate
• Interest on mortgage bonds

Other types of interest are (for Czech non-residents) subject to withholding tax (either 25% or 15%, subject to the appropriate double tax treaty). For Czech residents and permanent establishments, the interest is subject to withholding tax (from 25% to 15%), except interest on loans and bank accounts used for business purposes. The latter is included in the personal income tax return.

In general, gifts worth more than CZK 200 received in connection with employment activity or business (self-employment) activity are subject to personal income tax. However, gifts received by individuals running a school, a health care facility, or a facility for abandoned animals or endangered species, in connection with the operation of any such facility, is not subject to personal income tax and exempt from gift tax (if received by individuals having permanent home in the Czech Republic; otherwise subject to gift tax [from 1% to 40%]).

Foreigners (non-"experts"-see below) in the country for more than 183 days per annum or having their permanent home in the Czech Republic*, are taxed on worldwide income (subject to appropriate tax treaties). Foreigners in the country for less than 183 days per annum, are taxed on income originating from sources in the Czech Republic.

* Permanent home is defined as a place where the taxpayer has their permanent abode under the circumstances indicating their intention to live there permanently.

Income from sources in the territory of the Czech Republic:

• Income derived from activities performed in a permanent establishment
• Income earned from a dependent activity (employment) which is performed in the territory of the Czech Republic or aboard ships sailing under the Czech state flag or aboard Czech aircraft
• Employment income from abroad, where the work is undertaken in the Czech Republic under the direction of a Czech taxpayer, even if exempt under a tax treaty or elsewhere in the tax law.
• Income from commercial, technical or other consultancy, managing or intermediary services, and similar services provided in the Czech Republic
• Income from payments made by legal entities having their seat, or individuals domiciled in the Czech Republic (foreigners - non-experts), or permanent establishments situated in the Czech Republic including:
• Payments for providing and using performance rights derived from industrial rights, designs of models, projects, technological know how (and other knowledge which is economically exploitable), and payments for the use of copyrights or similar rights.
• Income derived from self-employment activity including architects, physicians, engineers, lawyers, scientists, teachers, tax and accounting advisors, and income from activities of artists, sportsmen, entertainers and their co-performers carried out, or remunerated in the territory of the Czech Republic (regardless of the character of the contract under which the activity is performed, and whether paid directly or indirectly)
• Dividends and distribution of profits and capital appreciation even on liquidation, and other income derived from capital
• After-tax profits paid to a "silent" partner (see below)
• Interest and other income from credits and loans, deposits and securities
• Rent paid for assets located in the Czech Republic (both movables and real estate)
• Remuneration of members of the statutory and other bodies of legal entities

"Foreign Experts." Experts are taxpayers resident abroad who have been sent by a foreign entity as specialists (experts) with specific knowledge in order to provide help to Czech legal entities in the Czech Republic or a foreign permanent establishment. They are only taxed on Czech source income, less:

• 1997 - 0% [1996 - 25%] of gross salary foreign social security (for USA-FICA) tax allowances see paragraph II

Bad news for American citizens. The Double Tax Treaty between the USA and the Czech Republic does not help most US citizens significantly. In this instance their Czech source income is fully taxable in the USA as if the Double Tax Treaty does not exist.

US Double Tax Treaty:

• article 1 paragraph 3: "A Contracting State may tax residents (as determined under Article 4 [Resident]) and its citizens, including former citizens, according to the laws of that State as if the Convention had not come into effect."
• article 4 paragraph 2/c: "The Czech Republic shall consider a United States citizen or an alien lawfully admitted for permanent residence (a green card holder) to be a resident of the United States only if such person has a substantial presence, permanent home, or habitual abode in the United States."