How to apply all Czech tax deductions when paying my income tax? What about tax discounts? What is the difference? There are so many questions that come up when foreigners try to optimize their taxes in Czechia. Having a solid understanding of what to deduct from your income tax while filing your tax return is very important. I know it might seem overwhelming, but it really isn’t. I love the fact that the government provides many ways to deduct some expenses from your taxes! In fact, I think all taxpayers in Czechia should use this – because it’s fair and legal, and it saves you money. In this article I’m going to walk you through the process of calculating your income tax in Czech Republic. Nice and slowly, step by step! At the end you’ll see how much money you can save on your income tax.
Please note, I do not have professional qualification to provide legal or tax advice. Information gathered in this article simply reflects my own experience and research on the topic. Use it as general guidance only.
As I wrote in my article with the general overview of Czech Tax Return process, your total income is not really the amount from which you calculate your tax. When you know your total taxable income, you need to identify and apply all the legal deductions. Only after that you apply your standard 15% income tax.
After you apply all the relevant Czech tax deductions on your income, you calculate 15% of it as income tax. But don’t rush to send this money to the Tax Office! There are some tax discounts (reliefs) that you can deduct from this amount before that. Also, if you are an employee, you probably know that your employer regularly pays your income tax on your behalf. These are called tax advances. So, you need to deduct the total amount of these tax advances from the tax you calculate at the end. If you see a positive number, it means throughout the year you paid more tax than you should have. If that’s the case, the Czech Tax Office will gladly return you the money.
As you can see there is a lot of nuance to this proces. And this is what many foreigners don’t realize when it comes to calculating their income tax in Czech Republic. So, let’s break it down step by step…
Step 1: Calculate your tax base from your income in all different categories
Income sourcing from employment
For the purposes of your Czech tax return this is your gross income (the salary stated in your contract), plus your employer’s contributions to your social security (24.8% of your gross salary) and mandatory health insurance payments (9%). In Czech it is often called superhrubá mzda. You can find the corresponding amount in your annual overview of taxable income (potvrzení o zdanitelných příjmech). Just ask your payroll team to provide you with this document, although they typically do it by default.
Income sourcing from entrepreneurship (živnost) or other independent activity
Such income typically is a result of some freelance work or through your trade license. When it comes to entrepreneurial or independent activities what’s considered for the tax purposes each year is the money you got paid during that year. So, for example if, you invoiced a supplier in 2019, but only got paid in 2020, this money shouldn’t be included in your 2019 Tax return (which you submit by March 2020).
Here you can deduct so called recognizable (or tax deductible) expenses. There are two ways to do that, and you can choose one of them each year. One way is to meticulously keep track of all your business expenses. It means collecting all the bills, and archiving them for several years. Another way, is somewhat simpler – you just apply flat rate expenses (paušální výdaje). This is a flat percentage (see below) of your income from this kind of activities.
I personally recommend the second option if you run your small business and don’t want to deal with additional administrative work. However, it’s important to note, that if your business expenses are really high, it pays off to go with proper accounting instead. In such case you must be able to prove “on paper” that the expense is legitimately made for business purposes. It must be with the intention of making money out of it later on. If it’s a legitimate business expense, then you can deduct it from your income.
If as an entrepreneur you experience a loss, you can deduct it from your total tax base, but not from the part of it that comes from employment. You can also decide to carry this loss for up to 5 years, to reduce your income base in the future.
How much can entrepreneurs (živnost) deduct from their income in Czechia?
Entrepreneurs in Czech Republic who run their businesses with a trade licence (živnost) can deduct 60% flat as recognizable expenses. However, the law also defines a maximum deductible, e.g. in 2019 it’s 1,2 milion CZK. If you happen to be in agricultural business then the flat expense rate is 80%, but maximum 1,6 milion CZK. Not bad, ha?!
How much can a freelancer deduct from their income without a trade licence
Freelancers who pay taxes in Czechia but don’t have any trade licence for their work also can use a flat rate for expenses. They can only deduct 40% from their income to calculate tax base in this way. The maximum in this scenario is different too, it’s 800 000 CZK. So, from the perspective of the tax base that influences how much tax you pay after all, having a trade licence in Czech Republic pays off in most cases.
Capital gains, or income sourcing from ownership of financial assets
Here go your investments and the money you get from them. Typically, 15% income tax is deducted from this before such capital gains are even paid to you. Just like in case of employment somebody else will pay this money to the government, on your behalf. In case of capital gains it can be the bank, where you invested your money and now receive interest from. Another good example is when you buy shares in a certain business and then get dividends paid to you. The total amount of dividends will be reduced by 15% and this tax will be paid by that business, on your behalf. But there are exceptions, and sometimes you will need to tax capital gains yourself!
So, I believe that if you have any income sourcing from this category and you’re not sure how to deal with it, you should hire a professional accountant.
Lease income (renting out your flat, your car etc.)
Any income sourcing from renting out your assets, typically real estate, should be included in your Czech Tax return. In this category you can deduct recognizable expenses, similarly to how you do it with income sourcing from entrepreneurship (see above). The difference is that if you decide to apply the flat rate for expenses instead of declaring actual expenses, the flat tax deduction is only 30% of your income. The maximum recognizable expense is 600 000 CZK for lease income in every given fiscal year.
Similarly to entrepreneurship income, losses you generate in your attempts to build a rental business for example, can be deducted from your total tax base. And again, not from the part that comes from employment income. And you can also decide to carry this loss forward, for up to 5 years.
Other income (e.g. selling a house)
Other types of income sometimes qualify for being stated in your Czech Tax Return, and can be a subject of income tax. One of the most common examples is when you sell real estate that you owned for less than 5 years, or where you hadn’t have your permanent address registered for at lest 2 years. Similarly, when you sell a car you owned for less than a year, and you manage to sell it for a higher price then what you initially paid for it – the difference is a taxable income.
I’m not going to go into details on this, as these cases are relatively rare among expats. But I recommend you to read my article about one common case when you actually don’t need to pay income tax in Czech Republic on some of your earnings. And, since we are talking about not paying income tax at all, you might want to check out my overview of who should and who should not submit their income tax return in Czechia.
Calculate your solidarity tax before you apply any tax deductions in step 2
Some of you are high-earning individuals, which means approximately you make above 90 000 CZK in any given month. If that’s the case, you may need to calculate an additional 7% solidarity tax on their income that exceeds a certain threshold. It’s a different topic though, so I wrote about it in my overview of the Czech solidarity tax article. Check it out if you think it could be relevant for you.
Step 2: Apply all standard Czech tax deductions defined by the tax code
Now, when you finally identified all your taxable income that falls into different categories, and deducted your expenses where possible (e.g. entrepreneurship, freelance work, lease income), let’s look at what kind of standard tax deductions the Czech law allows you to apply on your total taxable income. If you meet conditions defined for these types of deductions, and if you attach required documents when submitting your tax return, you can deduct these amounts from your tax base. Note, all documents must be provided in Czech!
The table below shows the most common types of Czech tax deductions, but the list is not exhaustive. For the complete list see § 15 of the Czech Income Tax law (586/1992), but the text is only available in Czech. The amount of tax deduction is specified on yearly bases, unless stated otherwise.
|Type of tax deduction||Conditions applied||Required documents|
|Interest paid for your mortgage||You use the house/flat to live in it.|
You pay interest to a legitimate financial institution.
Maximum amount: 300 000 CZK
|Copy of your mortgage contract.|
Overview of paid interest. (banks typically send this out in January)
Proof of ownership from Real Estate Registry (Katastr nemovitostí)
|Life insurance or private pension insurance contributions||Your contract is signed for over 5 years.|
The money can’t be paid to you before you are 60 y/o.
In case of pension contributions you can only deduct the amount that exceeded 12 000 CZK in the given year.
Maximum amount: 24 000 CZK
|Copy of your private pension insurance contract.|
Overview of paid contributions issued by your Insurance provider.
|Payments for completion of examination / courses that are directly aimed at your advancement in professional qualifications||You paid for it, not your employer.|
The examination is aligned with strict legal requirements. (The course provider should be able to prove that)
Maximum amount: 10 000 CZK (up to 15 000 CZK in some cases)
|Confirmation of payment|
|Donations for charitable purposes||Minimum amount: 1000 CZK or 2% of your total tax base|
Maximum amount: 15% of your total tax base
|Confirmation from the recipient of your donation (it must be a legitimate charity)|
Step 3: Apply 15% income tax rate on your remaining taxable income
So, here comes the income tax calculation. By now you’ve identified all your taxable income, you deducted your direct expenses where possible, you applied all the standard deductions (e.g. mortgage interest, donations etc.) and now you should calculate your tax before discounts. But before you do that, there is one tiny step – round your taxable income down to 100 CZK. So, for instance, if after all the deductions you see 720 566 CZK, you should round it down to 720 500 CZK. That’s your taxable income that you should calculate the tax on. Now, just calculate 15% of that taxable income.
Step 4: Apply all legal tax discounts (reliefs) as per the Czech law
The Czech tax code defines many discounts and reliefs for taxpayers. If you understand Czech, have a look at the § 35ba of the Czech tax code for more details. Here I’m just writing about the most common Czech tax discounts that can bring you the biggest savings on your income tax.
Taxpayer discount is the basic discount that every single taxpayer in Czech Republic is eligible for, including working pensioners. The annual discount is 24 840 CZK as of 2019, and it’s been like this since 2012. This discount can be applied either annually, when you do your taxes, or monthly (1/12 of the total discount). Typically, if you are employed and you sign a so called Růžový papír with your employer, they’d deduct the corresponding amount from the taxes they pay on your behalf each month. That is why you can only sign that paper with one employer, if you work for more companies.
Even if you only worked for a limited amount of time during the year, when you submit your tax return to the Czech Tax Office you can apply the total amount of this discount. This discount could bring the total amount of tax you’d pay to zero, but not below that (tax bonus). So, for example, as a freelancer you only made 100 000 CZK this year working for 2 months only. Your tax base would be 60 000 CZK (100 000 – 40%), and corresponding 15% tax would therefore be 9 000 CZK. You can apply your annual taxpayer discount, despite the fact you only worked for 2 months. This will technically mean you have a negative number for the tax you should pay. But since this discount can only bring your tax to zero and not lower, you’ll simply pay 0 CZK on income tax.
Discount for a spouse without income
You can deduct the amount of this discount from your calculated tax if two conditions are met. First, you must have a shared household with your spouse and, second, they can’t be making over 68 000 CZK per year (as of 2019 fiscal year). Along with your tax return, you should attach a document proving your spouse’s income in order to apply this discount. Social Security payments your spouse might be receiving during the year do not go into the calculation of that total amount of 68 000 CZK.
In case you qualify for this discount, you can deduct 24 840 CZK from your tax as of 2019. In case your spouse has a disability card (ZTP/P), your discount amount doubles. This discount can be applied annually, or as 1/12 of it every month (this is typically the case if your payroll does your taxes when you’re employed). Similarly to the taxpayer discount, this one can’t bring your total tax liability down to zero, but not below that.
Students also pay less taxes in Czech Republic
If you are a student up to 26 years old, or 28 years old in case of full-time PhD students, you can apply a special student discount on your taxes. The total amount is 4020 CZK annually, but you can decide to apply 1/12 of it each month (typical case for working students). All you need to apply this discount is a confirmation of studies from your school / university.
Similarly to the taxpayer discount, this discount can bring your total tax down to zero, but not below that. Student discount can be applied by full-time school students and University students who study either full-time or part-time.
You are eligible to use this discount for each month when your student status is valid during the year. This is true in case you were employed while studying, as well as if you weren’t employed in parallel. So for example, if you graduate (or they kick you out) from University in May, legally you’re still a student in the month following your graduation, unless you get a full time employment immediately. So, let’s imagine you start working full time in July or later. That means you can apply 6/12 (January to May + June = 6 months) of this discount, deducting it from your tax at the end of the year. The math is slightly different for high-school students, but I don’t think it’s relevant for this article.
Discount for every child in your care
If you are a parent or a legal guardian of a child up to 18 years of age (or of a student up to 26 years of age) you can deduct a discount from your tax for each of your children. Note, that the discount for every next child in your care is higher than the one for the previous child. I guess this is one of the ways in which the state tries to encourage birthrate. So with each next child, your tax savings grow exponentially. Here are the amounts of discount that are valid for 2019 fiscal year:
- 15 204 CZK for the first child
- 19 404 CZK for the second child
- 24 204 CZK for the third and every next child
You must be able to prove the child lives in your household and that your spouse does not apply this discount on their tax. Only one of the parents can apply this discount, so it makes sense to have the parent with the highest income do that. In case your child is a student, you’ll need to get a confirmation of their studies from their school / university as well.
With all above mentioned discounts for children in your care it’s valid that the amount doubles in case your child is a holder of a disability card (ZTP/P). Also, unlike other discounts, this one can actually bring your total tax liability down below zero. This effectively means you can get extra money from the government along with your regular pay in case you do your taxes properly and apply these discounts.
Discount for placing a child into nursery
If your child attends a legitimate (registered) nursery, you can deduct these expenses from your tax. The maximum amount you can deduct is the same as the minimum wage in Czech Republic, which is 13 350 CZK for 2019 fiscal year. Along with your tax return you need to submit a confirmation of payments you made to the nursery throughout the given fiscal year. Of course, you can only apply this discount if the child lives with you in a common household. And only one of the parents / guardians can apply the discount in their tax return. This discount can bring your total tax down below zero.
Other Czech tax discounts
The list above is not exhaustive. I just wanted to break down the most common cases. There are other discounts, such as additional discount for holders of disability card (ZTP/P) etc. I’m not personally familiar with tax discounts for this category of taxpayers, but you can read more about EU regulations in regards ZTP/P here.
In case you have multiple sources of income and you think you qualify for many different discounts, I recommend you hire a tax adviser, in order to maximize your tax optimization.
You can deduct above mentioned discounts from the amount of tax you preliminary calculated in the previous step. At this stage you come to see the final amount of tax you should pay.
Step 5: Fill in your tax return and pay your Czech income tax
Now, all you need to do is to file your Czech tax return and pay your income tax. In another article I wrote about the actual process of filing your Czech Tax Return more in detail. So, make sure to read it if you need guidance with the process.
How to pay your income tax in Czech Republic?
Let’s look at paying your income tax now. Obviously, you won’t need to pay anything, if after all the calculations it turns out that your return is positive. In such case the Tax Office should in fact return you some of the money you paid as income tax throughout the year. When I was dealing with my taxes, in my experience, they usually send the money in March – April, depending on when you submit your tax return.
If do need to pay income tax, the Czech Tax Office accepts cash payments, postal payments as well as regular bank transfers. I believe paying with a regular bank transfer is the easiest and safest way. Just make sure you enter all the details correctly! It’s not a joke! 🙂
Correct bank account for paying your Czech income tax
You can read about the Tax Office’s bank account number on their website, luckily the page is available in English. Here is a basic breakdown of the logic for your convenience:
- The first three to five digits represent the type of tax you are paying. For example, it’s 721 for income tax paid immediately after you submit your Czech tax return. This portion is followed by a hyphen (-).
- Next comes the main part of the bank account number – your local Tax Authority’s number. For example, for Prague residents it’s 77628031. Then comes a dash sign (/).
- After the dash you should put the bank number. Since the Czech Tax Office runs all their bank accounts with the Czech National Bank, this number is always 0710.
- The Variable symbol is for them to be able to identify the taxpayer, so here you should put your Birth number (rodné číslo) or your Taxpayer identification number (daňové identifikační číslo, also called DIČ), if you have one.
- The Constant symbol clarifies the payment method (cash or cashless). When you pay your income tax via a regular bank transfer this number is 1148. I think this clarification is pretty redundant, but these are the rules!
Czech Income Tax deductions in practice – example
To illustrate the logic of the content of this article a bit better, here is a practical example of what calculations could look like. Let’s assume the following case:
- John has been living in Prague for over a year, and therefore he is a tax resident of Czech Republic now.
- He works full time for a Czech company and earns 50 000 CZK per month before tax (brutto).
- Sometimes he does some freelance work offering his Social Media Marketing services to people and businesses all over the world. In the current fiscal year he earned 100 000 CZK doing freelance work, but he doesn’t have any Trade licence for it.
- He is a single father, his child is 12 years, but he forgot to tell his payroll about this.
- In November he took a mortgage and bought a flat in Prague, so far he only made one payment for his mortgage (in December) which was 10 000 CZK.
That’s all we know about John, so we assume there are no other factors. So, let’s see how John would calculate his income tax.
John’s income was 862 800 CZK before tax. It’s a combination of his employment income and what he earned doing freelance work. When it comes to employment income, as mentioned above, his employer’s contributions on social security (24.8%) and health insurance (9%) should be included in total income. When it comes to freelance work, he can deduct 40% by default as expenses, but not more, because he doesn’t have any trade licence.
from employment (annual): (50 000 + 24.8% + 9%) x 12 = (50 000 + 12400 + 4500) x 12 = 802 800 CZK
from freelance work – flat rate for expenses: 100 000 – 40% = 60 000 CZK
John has his bank’s confirmation of paid interest. It shows that out of 10 000 CZK he had paid for his mortgage in December, 9 500 CZK was interest. So, he knows he can deduct this interest from his income tax base.
862 800 – 9 500 = 853 300 CZK
Note, that this is a nice round number, but if it was for example 1 CZK less, John would need to round this number down to 853 200 CZK. Now he calculates his tax before discounts.
853 300 x 15% = 127 995 CZK
At this stage John is going to apply his taxpayer discount (24 840 CZK) and the discount for his child (15 204 CZK). He could have notified his payroll about the fact he has a child. If he did that payroll team would be applying this discount monthly for him, so every month he’d be paying a bit less on income tax. But he didn’t tell them anything, so now he should apply the discount for his child himself.
127 995 – 24 840 – 15 204 = 87 951 CZK
So, 87 951 CZK is the total income tax John must pay for the fiscal year.
However, John is well aware that his employer was making tax advances on his behalf throughout the year. This means that every month his employer paid John’s 15% income tax to the Tax Office on John’s behalf. He also knows that since he signed a so called růžový papír with his employer’s payroll, they applied his taxpayer discount when calculating these tax advances. It should be around 15% of the amount that comprises of his annual gross salary and his employer’s contributions to his social security and mandatory health insurance, minus taxpayer discount. So, John expects it to be around (802 800 x 15%) – 24 840 = 95 580 CZK.
The exact amount his employer had paid would be slightly different, due to varying rounding involved in monthly vs. annual calculation. But John needs to know the exact amount paid to the Tax Office. For that he is going to check the overview of taxable income form (potvrzení o zdanitelných příjmech) he obtained from the payroll department. There he is going to look for the amount stated next to a phrase that says skutečně sražená záloha (which means “actually withheld tax advance”). Le’t assume the amount written there is 95 591 CZK.
So, based on John’s income that is a subject of his income tax in Czech Republic, in total he should pay 87 951 CZK after applying all Czech tax deductions and discounts. But throughout the year his employer has been paying tax advances, which made a higher amount of money after all, i.e 95 591 CZK. That means the Czech Tax Office must return 7640 CZK (95 591 – 87 951) to John. He is going to write that in his tax return and submit it.
By the way he is probably going to submit his taxes online, because he is smart. 🙂 If you want to be like John, you can read more about doing your Czech taxes online in my other article. That’s it! That’s the happy example of John, the taxpayer in Czech Republic. I hope you enjoyed it and you found this article useful.
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Learn more about Czech taxes in English
- Czech solidarity tax: who pays it and how to get this money back?
- When you don’t need to pay income tax in Czech Republic?
- Czech tax return: tax deductions and discounts you should know about
- Czech tax return: when, how, where? Plus tax advisers who speak English.
- Czech tax return: should you submit it yourself? Czech tax resident vs not.