Tax Guide for US Expats Living and Working in the Czech Republic
Who Is Liable For Income Taxes in the Czech Republic
Czech residents are subject to tax on their worldwide income. Nonresidents are subject to tax on Czech-source income only. Nonresidents are taxed as residents on their Czech-source income, except for certain types of income. In addition, they may have different personal allowances.
The term “resident” includes any person residing in the Czech Republic for at least 183 days within a calendar year or having a residence (permanent home) in the Czech Republic. Employment income received by a nonresident whose employment activity in the Czech Republic does not exceed 183 days during any 12 successive calendar-month period is exempt from tax in the Czech Republic if it is paid by a foreign entity without a permanent establishment in the Czech Republic and if no economic employment exists (see next paragraph).
Individuals assigned by a foreign employer to the Czech Republic who continue to be employed and paid by the foreign employer, and who perform work for and under the instruction of a Czech resident individual or legal entity, are deemed to be employed by the Czech resident individual or legal entity and are subject to monthly withholding of personal income tax from their employment income.
Income subject to tax. The taxation of various types of income is described below.
Employment income. Employment income includes salaries, wages, bonuses, other compensation of a similar nature and most benefits in kind. Employment income also includes fees paid to directors and shareholders of private limited companies and to limited partners of limited partnerships for work performed for the company or partnership, regardless of whether their position with the entity is one of authority.
The tax base for employment income equals the sum of the gross income of the employee and the employer’s portion of mandatory Czech social security and health insurance contributions. For employees who are not subject to the Czech social security and/or health insurance system, the tax base for employment income equals the sum of gross income of the employee and the employer’s portion of deemed mandatory Czech social security and/or health insurance contributions.
Self-employment and business income. Taxable self-employment and business income consists of income from business activities and professional services, less deductible expenses. Authors, lecturers, athletes and artists are considered providers of professional services. Net income from business activities and professional services is subject to tax with other income at the rates.
Investment income. Czech-source interest income derived from personal investments is subject to a 15% final withholding tax. However, if the source of the interest income is part of the individual’s business activities, the interest income is taxed in the individual’s tax return. Other investment income, including dividends and limited partners’ shares of partnership profits, is subject to a 15% final withholding tax. Rental income and nonrecurring income (for example, arbitration awards) generally are taxed with other ordinary income at the rates.
Dividends and interest derived by residents from foreign sources are taxed in the individuals’ tax return.
Royalties and fees for professional services, such as directors’ fees and payments under management or consultancy agreements, derived by nonresidents are subject to a 15% withholding tax. Non-residents’ rental income is subject to a 5% final withholding tax on lease-purchase contracts and to a 15% final withholding tax on other rental income. These rates may be reduced under applicable tax treaties.
Capital gains and losses.
Capital gains derived from the sale of property acquired for the purpose of resale or exchange for profit are taxed as ordinary income at the rates. Capital gains realized from the sale of real or personal property not acquired for resale are generally exempt from income tax if the minimum required holding period is met. The minimum required holding periods are 12 months for automobiles, 2 years for a primary residence and 5 years for other immovable property. Other holding periods apply to other types of personal property. The sale of securities is exempt from tax if the securities have been held for a period of more than 6 months and if the individual had less than a direct share of 5% in the company in the 24-month period preceding the sale.
The sale of other securities is generally exempt if the holding period exceeds five years.
In general, capital losses derived from the sale of securities cannot be carried forward and they can be offset only against gains derived from the sale of other securities during the same tax period. The same rule applies to movable assets or immovable property. As a result, gains derived from the sales of such assets can be offset only against losses derived from the sales of the same types of assets.
Taxation of employer-provided stock options. No specific law in the Czech Republic addresses the tax treatment of stock options.
In general, employer-provided stock options do not result in a taxable event until the option is exercised if the following conditions are met:
- The exercise price is at least equal to the fair market value of the underlying stock at the date of grant.
- The option is not transferable.
- The option is subject to a suspensive condition and is capable of lapsing before it vests (for example, if the option holder ceases to be an employee).
However, this treatment is not a settled matter, particularly whether the taxable event occurs at grant, vesting or exercise. Readers are encouraged to consult with professional advisors on this matter. The taxation of stock options must be examined on a case-by-case basis.
The difference between the exercise price and the fair market value of the stock at the date of exercise is generally taxed as employment income at the exercise date, at the same tax rate applicable to other employment income. Capital gains derived from the sale of shares by an individual are taxed as described in Capital gains and losses. If the capital gains are not exempt fromincome tax, the excess of the sale proceeds over the exercise price is taxable, at the rates, in the year of disposal.
Business deductions. In general, expenses and costs are considered to be deductible for tax purposes if they are incurred to generate, assure and maintain taxable income. In addition, the law explicitly provides that certain expenses are deductible (for example, depreciation) and that certain expenses are not deductible. Instead of deducting actual expenses, taxpayers engaged in certain business activities may choose to deduct a percentage of gross revenues as lump-sum costs. The percentage of lump-sum costs varies depending on the individual’s business activity.
Rates. Taxable income of residents and nonresidents, other than income subject to withholding tax, is taxed at a flat rate of 15%.
Tax reliefs. Czech tax residents may subtract tax reliefs from their annual tax liability. The amounts of these reliefs for 2011 are described below.
The annual personal tax relief is CZK 23,640. In addition, tax relief of CZK 24,840 is granted for a spouse living in the same household with the taxpayer, unless the spouse’s annual income exceeds CZK 68,000.
Additional personal tax relief of CZK 2,520 is granted for partially disabled persons and of CZK 5,040 for totally disabled persons.
Tax relief of CZK 11,604 is granted for each dependent child. The tax reliefs, except for the personal tax relief, are available to nonresidents only if their Czech-source income accounts for at least 90% of his or her total annual income.
Relief for losses. Losses incurred in self-employment or rental activities may be carried forward for five years.
B. Inheritance and gift taxes
If a deceased person was a citizen of the Czech Republic and had his or her permanent home in the Czech Republic, inheritance tax is imposed on his or her entire movable property, regardless of whether the property is located in the Czech Republic or abroad, and on his or her immovable property located in the Czech Republic. If the deceased person was a Czech citizen who did not have a permanent home in the Czech Republic or was not a citizen of the Czech Republic, inheritance tax is imposed on his or her movable and immovable property located in the Czech
Republic. No inheritance tax is imposed on immovable property located abroad.
In general, Czech nationals and foreigners with permanent residence in the Czech Republic are subject to gift tax on all movable and immovable property, apartments, commercial premises, securities, domestic currency, foreign currency and other property acquired by gift in the Czech Republic or abroad, except for real estate located abroad. Donors are subject to gift tax on donations abroad.
Inheritance and gift tax rates vary, depending on the recipient’s relationship to the deceased or donor. Recipients are divided into the following groups:
- Group I, which consists of lineal relatives and a spouse
- Group II, which consists of brothers, sisters, lineal relatives of a spouse, children’s spouses, nieces, uncles, aunts and persons who lived with the transferor longer than one year in one house hold
- Group III, which consists of other beneficiaries and includes both individuals and all legal entities
The tax rates are progressive and range from 0.5% to 40%. Group I and Group II recipients are exempt from inheritance and gift taxes.
C. Social security
Contributions. Social security and health insurance contributions are paid by both the employer and the employee on employment income at the following rates.
We have been preparing US income tax returns for US Citizens and permanent residents living in the Czech Republic for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in the Czech Republic and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the Czech Republic tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Czech Republic Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working in the Czech Republic, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in the Czech Republic.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a consultation by phone, skype or email