Extended business travelers are likely to be taxed on employment income relating to their Czech workdays. Non-residents are liable to pay tax on income generated from sources in the Czech Republic.
Liability for income tax
A person’s liability to Czech income tax is determined by the individual’s tax residence status. A person can be a resident, non-resident, or split resident for part of the year for Czech tax purposes.
An individual will be considered a Czech resident for tax purposes if:
- the individual’s permanent residence is in the Czech Republic
- the individual usually resides in the Czech Republic.
Individuals who usually reside in the Czech Republic are understood to be persons who stay in the Czech Republic for at least 183 days in a given calendar year, either continuously or intermittently.
The general rule is that a person who is a tax resident of the Czech Republic is liable to declare and pay tax in the Czech Republic on the individual’s worldwide income, which includes employment income, income from self-employment, rental income, investment income and capital gains, and other taxable income from whatever source.
Individuals who are Czech non-residents for tax purposes are subject to tax only on income from Czech sources.
Tax trigger points
The taxpayer must file an annual income tax return for all resident years. The taxpayer must also file an annual income tax return for the year in which the assignee leaves the Czech Republic, provided that in the year concerned, the taxpayer performed activities in the Czech Republic and is not protected by a double tax treaty. The tax return is to be filed within the statutory deadline(s) for filing.
In the years following the year of expatriation, the assignee does not generally have any filing requirements provided that the assignee is treated as a tax non-resident and has no Czech-sourced income.
If, however, the assignee receives Czech-sourced income related to the individual’s prior work in the Czech Republic, the assignee may be liable to declare and pay tax in the Czech Republic on a proportionate part of the income.
Types of taxable income
For extended business travelers, the types of income that are generally taxed are employment income, Czech-sourced income, and gains from taxable Czech assets (such as real estate).
The aggregate income is taxed at a flat rate of 15 percent. In the case of employment income, the rate is applied to a ‘super gross’ salary. A ‘super gross’ salary is calculated as gross salary increased by 34 percent of the employer part of the Czech obligatory social security and health insurance contributions (even in the case when the individual remains insured abroad). As a consequence of this calculation, the effective tax rate is 20.1 percent until the cap for social security contributions is reached (see the section “Cap for social security” that follows). In addition to standard 15 percent flat rate, as of 1 January 2013 there is a new 7 percent solidarity tax imposed on annual’s gross personal income (including both employment and self-employment income) over 1,245,216 Czech Republic koruna (CZK). The solidarity tax on employment income is, however, due also monthly in each month when income exceeds 1/12 of the above threshold as an advance payment.
Liability for social security
Extended business travelers employed by an employer located in a European Economic Area (EEA) member state or Switzerland can remain, in most cases, subject to their home country’s social security scheme. This exemption is based on the EEA/Swiss rules with respect to postings and/or simultaneous employment.
Other extended business travelers, in some cases, may stay in their home countries’ social security systems and obtain an exemption from paying Czech social security based on the provisions of social security totalization treaties signed between their home countries and the Czech Republic.
If no continued home country social security coverage and no subsequent exemption from social security contributions are available, an extended business traveler will be subject to Czech social security.
An employee who works in the Czech Republic for an employer with a registered office outside the Czech Republic is exempt from the social security scheme, provided that the employer’s registered office is in a country that has not concluded a totalization agreement on social security with the Czech Republic, and provided that the employee is not considered an economic employee of a Czech entity.
If the individual is considered an economic employee of a Czech entity, the employee as of 1 January 2014 shall be subject to Czech social security from the first day of the employee’s work in the Czech Republic.
Social security rate
The employer’s social security rate is 34 percent, consisting of 25 percent for the social insurance scheme and 9 percent for the health insurance scheme.
The employee’s social security rate is 11 percent, consisting of 6.5 percent for the social insurance scheme and 4.5 percent for the health insurance scheme. As of 1 January 2013 the individuals may also participate in a new pension savings scheme. In such a case, the employee would be obliged to pay monthly social insurance contributions in the amount of 8.5 percent. In such a case, 5 percent from the paid social insurance contributions will be transferred by the social authority to the employee’s personal pension’s savings account.
Cap for social security
For social security payments, both the employee´s and employer´s portions, the maximum assessment base is set (for 2014, the cap for social insurance scheme is CZK1,245,216. The health insurance contributions, both the employee’s and employer’s portion are uncapped for period 2013 – 2015. Once the cap for social insurance payments is reached, no more social insurance contributions are due from either the employee or employer during that year.
Employee compliance obligations
Tax returns must be submitted by 1 April of the following year, or 1 July if the return is prepared and submitted by a certified tax adviser. In the latter case, a power of attorney on behalf of the tax adviser must be lodged with the tax authority by 1 April in order to obtain the automatic extension of the deadline to 1 July.
Employer reporting and withholding requirements
Withholdings from employment income are covered under the Pay-As-You-Go (PAYG) system. The income of an individual paid by a Czech entity (this includes also Czech branch of a foreign entity) based on a local contract with a Czech entity, or working in the Czech Republic under the economic employer structure, is subject to monthly wage tax withholdings. The withholdings are made by the employer or economic employer through payroll deductions. Similarly, also a foreign entity having its permanent establishment (PE) in the Czech Republic (except the service PE) or employing in the Czech Republic employees for a period of more than 183 days is obliged to make withholdings through payroll deductions.
In other cases, there are no withholding requirements, and the tax is reflected fully through the personal income tax return.
Work permit/Visa requirements
Other immigration considerations
Foreign nationals who come to the territory of the Czech Republic are subject to the so-called Foreigners Act, which establishes two categories of foreigners:
- EU citizens; the same treatment is applied to citizens of the European Economic Area (EEA: Norway, Iceland, Liechtenstein) and Switzerland and their family members; and
- Nationals of third countries, i.e. countries excluding the EU/EEA and Switzerland.
European Union (EU) nationals
EU nationals, the EEA or Switzerland, and their family members are no longer required to obtain both a work permit and a residence visa to work in the Czech Republic, regardless of whether they are employed by a local or foreign company. EU citizens may stay temporarily in the Czech Republic, without any permit, on the basis of a passport or an identity card. Under the Foreigners Act, if their intended stay is longer than 30 days, foreigners are required within 30 days of arrival to report their presence to the office of the Foreign Police responsible for the area in which they are staying. If they intend to stay in the Czech Republic for longer than three months, they can request a certificate of temporary residence or a permanent residence permit.
Third country nationals are subject to visa policy. For short-term stays (not exceeding three months), most are required to hold a visa, while citizens of some third countries are exempt from the visa requirement. Here is the list of countries. To stay in the Czech Republic for more than three months, citizens of non-EU countries require a long-term visa or a long-term or permanent residence permit.
Third country nationals may be recruited and employed provided that:
- the foreigner has a valid work permit and a valid residence permit for the Czech Republic, or
- holds a green card (a permit for long-term residence for employment purposes in the Czech Republic under special circumstances), or
- holds a blue card (a long-term stay permit for the purpose of employment for foreigners with a higher qualification that is in demand in the Czech Republic).
The green card may be abolished during 2014 as a result of implementation of Directive 2011/98/EU on a single application procedure for as single permit for third-country nationals to reside and work in the territory of a Member State and replaced by new dual document.
Double taxation treaties
In addition to Czech domestic arrangements that provide relief from international double taxation, the Czech Republic has also entered into double taxation treaties with more than 80 countries to prevent double taxation and allow cooperation between the Czech Republic and overseas tax authorities in enforcing their respective tax laws.
Permanent establishment implications
There is the potential that a permanent establishment could be created as a result of longer-term activities of extended business travelers, but this would be dependent on the type of services performed, the length of stay in the Czech Republic, the structure under which the extended business travelers work in the Czech Republic, and the level of authority the employees have.
A transfer pricing implication could arise to the extent that the employee is being paid by an entity in one jurisdiction but performing services for the benefit of the entity in another jurisdiction, in other words, a cross-border benefit is being provided. This would also be dependent on the nature and complexity of the services performed.
If the companies are regarded as related through equity/capital, or as otherwise related persons, there may be a transfer pricing issue as market prices should be used.
Local data privacy requirements
The Czech Republic has data privacy laws.
There are no extraordinary exchange controls placed on individuals that restrict the transfer of money into or out of the Czech Republic.
Non-deductible costs for assignees
Generally, some benefits provided by the employer are regarded as non-deductible on the employer side, such as school fees or medical care provided in kind, but these are tax exempt on the side of the assignee.
There are two types of indirect taxes: value-added tax (VAT) – charged on most supplies of goods and services; and excise duties – charged on supplies of specific goods such as fuels, beer, wine, spirits, and tobacco.