The institution of the lump-sum tax scheme was introduced effective as of 1 January 2021 by Act No. 540/2020 Coll., amending the Income Tax Act (Act No. 586/1992 Coll., as amended). The proposal for 2023 is to raise the income ceiling for participation in this scheme to CZK 2,000,000.
The institution of lump-sum taxation was introduced with effect from 1 January 2021 by Act No. 540/2020 Coll., amending Act No. 586/1992 Coll., on income taxes, as amended.
The essence of the lump-sum tax scheme lies in the option of selected income tax payers to choose whether to pay income tax and social and health insurance contributions as before (which involves filing a tax return, reporting for insurance purposes, making payments to three different institutions) or instead choosing a lump-sum tax scheme that will reduce their administrative burden (as it is no longer necessary to file a tax return and social and health insurance reports; instead, only one monthly payment is made which includes tax, health and pension insurance).
In connection with the lump-sum scheme, the Income Tax Act does not directly oblige the taxpayer to keep any specific records. However, since it may happen that the taxpayer will be obliged to file a tax return (if they fail to meet the conditions for a lump-sum tax), they are obliged to keep the records necessary for the correct determination of tax within such tax return, i.e., in particular, records of their income.
The requirements for lump-sum tax payers are governed by Section 2a of the Income Tax Act, where the conditions for participating in the lump-sum scheme are laid down – the taxpayer is a self-employed person, is not a VAT payer, is not a partner in a general partnership or the general member of a limited partnership, is not a debtor against whom insolvency proceedings are being conducted, and, during the assessment period immediately preceding the reference period, did not have income exceeding CZK 1 000 000 and does not carry out activities that generate income from a dependent gainful occupation.
During the assessment period, the taxpayer pays the so-called monthly lump-sum advance (due by the 20th day of the calendar month for which the advance is paid). The amount of the lump-sum advance for 2022 is CZK 5 994 and consists of an advance on income tax in the amount of CZK 100, an advance on pension insurance in the amount of CZK 3 267 and an advance on health insurance in the amount of czk 2 627.
For 2023, it is proposed to increase the income limit for entering the lump-sum tax scheme to CZK 2 000 000. The increase is related to the proposal to increase the limit for registration for value added tax to CZK 2 million.
As of 2023, the plan is therefore to divide taxpayers into three brackets according to the income they generate: a first bracket for taxpayers with income up to CZK 1 000 000, a second bracket for taxpayers with income up to CZK 1 500 000, and a third bracket for taxpayers with income up to CZK 2 000 000. Depending on what bracket a taxpayer is assigned to, the amount of their monthly lump-sum advance will differ (from approx. CZK 6 500 in the first bracket, to approx. CZK 16 000 in the second and CZK 26 000 in the third bracket).
Only the amount of income (1 million) will be decisive for entering the first bracket, whereas it does not matter from what separate activity this income is derived. However, a taxpayer with a revenue of up to 1.5 million may also apply to be entered in this bracket if they fulfill the condition that 75% of their income is eligible for the 80% flat-rate expense deduction (income from agricultural production, forestry and water management and handicrafts) or the 60% flat-rate expense deduction (other trades – such as sales), and so may a taxpayer with income up to CZK 2 million, as long as 75% of their income will be eligible for the 80% flat-rate expense deduction.
The second bracket includes taxpayers with income of less than 1.5 million or taxpayers with an income of less than 2 million who can demonstrate that 75% of their income is eligible to the 80% or the 60% flat-rate expense deduction.
The third bracket will includes all other taxpayers with income up to CZK 2 million, no matter the type of income.
The taxpayer will have to keep records of revenue based on the flat-rate expense deduction which they claim, to ensure that they are correctly placed in the different brackets. It will be mandatory by law to keep a record of revenue achieved.
The adoption of these changes is foreseen for the end of 2022.