The flat-rate tax for self-employed persons is to undergo significant changes from 2023. The government's amendment to the Income Tax Act and related regulations is now in the Chamber of Deputies as Parliamentary Document 254, currently in its second reading.
Following the increase in the limit for compulsory VAT registration to CZK 2 million the number of taxpayers - non-payers of VAT who will be able to use the flat-rate tax will significantly increase. The amount of the flat-rate tax will no longer be uniform. It will now be graduated into three bands, depending on the amount of income and the category of taxpayer. The amendment provides for the following annual flat-rate tax amounts:
- Band 1: approx. CZK 75,600 (approx. CZK 6,300 per month) - current flat tax
- Band 2: CZK 192,000 (CZK 16,000 per month)
- Band 3: CZK 312,000 (CZK 26,000 per month)
The division into bands is rather complicated and looks cluttered. The table below summarises the expected amount of the flat-rate tax depending on the amount of income earned by each group of taxpayers. The categories of taxpayers are linked to the level of the expenditure flat rate that the taxpayer would be entitled to claim if expenditure were set as a percentage of income.
|
Annual income |
< CZK 1 mil. |
< CZK 1.5 mil. |
< CZK 2 mil. |
|
Taxpayers with a flat rate of 80% |
CZK 75,600 |
CZK 75,600 |
CZK 75,600 |
|
Taxpayers with a flat rate of 60% |
CZK 75,600 |
CZK 192,000 |
CZK 192,000 |
|
Other taxpayers |
CZK 75,600 |
CZK 192,000 |
CZK 312,000 |
As we have seen from past practice, a flat tax can be very advantageous. Especially for taxpayers who do not claim tax deductions (e.g. child tax credits) or only in a minimal amount. The following table shows the effective tax rate of the flat-rate tax when the income thresholds of CZK 1, 1.5 and 2 million are reached. The last column shows the tax rate resulting from the total contributions of self-employed persons when applying expenses set as a percentage of income. In the calculation, we have considered only the basic taxpayer allowance and assume that actual expenditure is zero.
|
|
Flat-rate tax scheme |
Expenditure % of revenue |
||
|
Annual income |
CZK 1 mil. |
CZK 1.5 mil. |
CZK 2 mil. |
CZK 1-2 mil. |
|
Taxpayers with a flat rate of 80% |
7.6% |
5.0% |
3.8% |
6.0% |
|
Taxpayers with a flat rate of 60% |
7.6% |
12.8% |
9.6% |
12.6% |
|
Other taxpayers |
7.6% |
12.8% |
15.6% |
19.8% |
A comparison of effective tax rates shows that even after the amendment, a flat tax may be a suitable solution, especially for self-employed persons engaged in so-called liberal professions.
As we mentioned in the introduction, the amendment to the VAT Act provides for an increase in the turnover for mandatory registration to CZK 2 million. Non-taxpayer status is one of the conditions for applying the flat-rate tax. In this context, the question arises whether existing taxpayers will be able to enter the flat-rate tax from the new year. The amendment to the VAT Act regulates this matter in transitional provisions. Taxpayers whose turnover in the previous 12 months exceeded CZK 1 million but did not exceed CZK 2 million will be subject to the new flat-rate tax. They will be able to apply to cancel their VAT registration within 5 days from the entry into force of the transitional provision. This transitional provision should come into force in the autumn. If the tax administrator delivers the decision on cancellation of registration by the end of this year, the taxpayer will become a non-payer on 1 January 2023 and can use the flat-rate tax. However, the amendment to the Income Tax Act also provides for a situation where the tax administrator's notification is delivered after 1 January, but no later than 16 January 2023. In this case, the taxpayer will also become a non-taxpayer, retroactively to 1 January 2023, and can use the flat-rate tax in this case as well.
The flat-rate tax offers potential tax savings, even for existing VAT payers. However, we recommend a thorough analysis before deciding whether to adopt the flat-rate tax scheme. We will continue to monitor the legislative process and will keep you informed of the final wording of the amendment.