A fundamental change to the Czech Income Tax Act is looming – the abolition of withholding tax on natural persons’ income from gainful occupation. This article explains what specific changes are being proposed by the government.
The government bill on the employer’s monthly single-form report has entered its third reading in the House of Representatives. What consequences will the adoption of this amendment have?
What is withholding tax?
Withholding tax is a special form of tax levied directly on the payment of certain income. The party paying this income (e.g. the employer, a bank or another institution) automatically withholds the tax amount and pays it to the tax authorities. The recipient therefore receives income that has already been taxed and in many cases is not even obliged to declare it in their income tax return.
The currently discussed amendment will abolish withholding tax on the remuneration of corporate officers (members of corporate bodies) of legal entities effective as of 1 January 2026, insofar as such remuneration is received by natural persons who are not resident in the Czech Republic for tax purposes. Until now, such income has been subject to 15% withholding tax, regardless of the amount of remuneration. In future, tax payments on account would instead be due on this income. This would abolish the unequal treatment of taxation of natural persons on the basis of tax residence.
A further, quite significant effect is that the aforementioned income of taxable foreigners will in the future become subject to progressive taxation (with a tax rate of 15% being applied to amounts up to 36 times the average salary; above this threshold, a tax rate of 23% applies).
The draft law also anticipates the abolition of withholding tax without replacement with effect from 1 January 2027 for income from gainful occupation (dependent work). This change particularly affects income for which no so-called “taxpayer’s declaration” has been signed, which derives from individual agreements to complete a job assignment (so-called DPP) and whose total amount at the level of the respective taxpayer remains below the monthly threshold for participation in sickness benefit insurance (currently CZK 11,499), or from marginal employment (e.g. income from so-called DPČ, or remuneration for holding corporate offices the monthly amount of which does not reach the threshold for participation in sickness benefit insurance – CZK 4,500/month), etc.
The circle of persons obliged to submit a tax return was originally intended to be broadened
Originally, it was considered that taxpayers with income from employment should be obliged to submit a tax return unless they ask their sponsor to perform an annual settlement of the payments on account. Following the latest modifications to the draft bill, however, the taxation principle remains essentially the same as with the current withholding tax – except that instead of the 15% withholding tax, a tax payment on account is now paid at the same rate. The entire process can therefore be left to be handled by the employer as previously. This means that taxpayers won’t have to deal with taxes on the above sources of income, unless they wish to claim tax bonuses or benefits.
The main argument for the abolition of withholding tax is the simplification of the tax system.
Conclusion
The abolition of withholding tax should make the tax system clearer and simpler. At the same time, the changes made to the original draft bill ensure that employees with low incomes are not unduly burdened: they may continue to take advantage of simplified taxation methods.
We will keep you informed as to whether the draft bill successfully passes through the legislative process and how any amendments are reflected in it.
Source: Parliamentary press No. 926/0 – Government bill amending certain laws in connection with the adoption of the Act on the single-form monthly employer’s report
